Reporting Taxable Amount of Life Insurance Premiums
- Sara Glore
- Stephanie Schmucker
According to the Internal Revenue Service, the cost of group-term life insurance an employer provides to an employee for coverage over $50,000 is to be included in the wages reported for the employee. This amount is subject to withholding for Social Security and Medicare, but not income tax. The cost is generally determined by using the uniform premium rates provided by the IRS. These rates set the cost of each $1000 of group-term life insurance for each month, according to the employee's age. Click here for more information from the IRS regarding Group-Term Life Insurance and related costs.
The following steps will ensure that the proper amounts will be taxed and placed on the W2 forms.
Processing a Life Insurance Premium Payment Through a Payroll.
Employee - Select the appropriate employee from the dropdown
Compensation - Select the appropriate compensation from the dropdown
Description - Life Insurance Premium
Pay Type - Life Insurance Premium
Effective Date - Leave blank if wanting to be processed the next payroll processed. Otherwise enter a date inclusive of the pay period beginning and ending dates of the payroll you want the payment to be included in
Units - 1
Rate - Enter the calculated life insurance premium amount
Applies For Retirement - Uncheck the checkbox
Retire Hours - Leave blank
Supplemental - Leave unchecked
Supplemental Tax Option - None
Click Save
Example of Payroll Payments-Future entry:
Example of Payroll Payments-Current Pay entry:
This pay type represents one kind of non-cash earnings for the employee. This pay type will be treated differently for taxation purposes. Using this non-cash earnings amount, the tax amounts for Medicare and Social Security will be calculated during the Initializing of the pay and Payroll/Payments-Current program. No Federal, Ohio, or OSDI tax amounts will be calculated. All of these will be treated according to the federal rules. The software provides the ability to withhold city tax on non-cash earnings. This can be activated by checking the "Tax Non Cash Earn" field on the city tax record in the Core/Payroll Item Configuration screen.
The Life Insurance premium non-cash earnings amount will not be included in the Total Gross amount on the Pay Report but is added in the 'All Pay' total on the Pay Amount Summary Report. However, the life insurance premium non-cash earnings amount will be included in the adjusted gross figure on the employee's payment because the amount is considered part of the taxable gross even though no tax is being withheld on it. Both the Pay Report and the Pay Amount Summary Report provide a total of all non-cash earnings in the Totals Section - NC1 total on the Pay Report and Other Pay on the Pay Amount Summary Report. This extra total will help with balancing.
Processing a Life Insurance Premium Payment That Was Not Processed Through Payroll
If the Life Insurance Premium Pay Type was not used prior to the last pay for the employee, the Life Insurance Premium (NC1 in Classic) payment amount must be entered manually. This insures the life insurance premium amount will show correctly on the W2 form.
Employee = Locate the employee by name or id
Payroll Item = 001-Federal Tax
Type = Life Insurance
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the Cost of Life Insurance calculation
Description = Can be added if desired
Click Save
The Total Gross and Applicable Gross fields for the Federal, State, City (if the "Tax Non Cash Earn" field is checked on the city tax record found on the Core/Payroll Item Configuration screen), OSDI, and Medicare. This is reflected on the W2 Report. When the employee files their city taxes, they will owe city tax (if applicable) for the life insurance amount not paid through the system.
When the Life Insurance Adjustment is added, each OSDI Payroll Items> Applicable Gross is increased by the life insurance amount. If an employee lived in multiple school districts throughout the year, the Applicable Gross for each OSDI Payroll Item will need to be calculated and Adjustments to reduce the OSDI's Applicable Gross accordingly should be entered. The Applicable Gross for OSDI Payroll Item is calculated by the following:
Cost Per Month = Total Life Insurance Amount/Number of Months the Employee Had the Life Insurance
Cost Per Month X Total Months in School District
Go to Core>Adjustments and create an adjustment for a negative value to adjust the Applicable Gross according to the calculations above.
A 'Difference in Adjusted Gross' will show for the Life Insurance Payments on the Quarter Report.
Option 1- Medicare Paid by Employee and Board
If the employee is responsible for paying their portion of Medicare, the following adjustments will need to be created:
Go to Core>Adjustments, click Create
Employee = Locate the employee by name or id
Payroll Item = Medicare Tax
Type = Amount Withheld
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the missed Medicare Withholding
Description = Missed Life Insurance Payment
Click Save
Go to Core>Adjustments, click Create
Employee = Locate the employee by name or id
Payroll Item = Medicare Tax
Type = Board’s Amount of Payroll Item
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the missed Medicare Withholding
Description = Missed Life Insurance Payment
Click Save
Example:
Life Insurance amount of $216.00 x .0145 = $3.13
$3.13 Amount Withheld for 692
$3.13 Board's Amount of payroll item for 692
Option 2 -Full Board Paid Medicare
Go to Core>Adjustments, click Create
Employee = Locate the employee by name or id
Payroll Item = Medicare Tax
Type = Board’s Pickup Amount of Payroll item
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the missed Medicare Withholding
Description = Missed Life Insurance Payment
Click Save
Go to Core>Adjustments, click Create
Employee = Locate the employee by name or id
Payroll Item = Medicare Tax
Type = Board’s Amount of Payroll Item
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the missed Medicare Withholding
Description = Missed Life Insurance Payment
Click Save
Go to Core>Adjustments, click Create
Employee = Locate the employee by name or id
Payroll Item = Medicare Tax
Type = Applicable Gross
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the missed Medicare Withholding
Description = Missed Life Insurance Payment
Click Save
Example:
Life Insurance cost is $216.00
$216.00/ 98.55% = $219.18 Applicable Gross.
$219.18 (life insurance) x .029 (.0145 x 2) = $6.36 Medicare Pickup Amount.
$3.18 ($6.36/ 2) for each, the Employee (being paid by the board as pickup) and Employer amount.
$219.18 - $216.00 = $3.18 Applicable Gross Adjustment
$3.18 Is the amount of the Board's Pickup Amount of the Payroll Item. This will update both Medicare Pickup for $3.18 and Medicare for $3.18 on the Employee's W2.
$3.18 Is the amount of Board's Amount of payroll item. This will update the 941 Quarter report 'QTD Employer's Medicare Contribution.'
$3.18 Is the amount of Applicable Gross. This will update the employee's W2 Taxable Gross for Medicare.
