Reporting Taxable Amount of Life Insurance Premiums

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.

• Calculate the taxable amount for each employee involved.

  •  Calculation Example

    A 35 year old principal receives $250,000.00 of board paid group term life insurance for an entire calendar year. The amount of excess coverage over $50,000.00 is used to determine the taxable coverage. In this example the amount of taxable coverage would be $200,000.00.

    $250,000 - $50,000 = $200,000

    Using this same figure, it must be determined how many thousands of dollars are involved.

    $200,000.00 / $1,000.00 = 200

    This figure will be used later to determine the annual cost. IRS Publication 15-B gives the cost per $1000.00 of protection for a 1-month period. The cost for this 35 year old is .09 per month. This must be multiplied by the number of months the coverage was in effect.

    .09 x 12 = $1.08

    The non-cash earnings amount is calculated by taking the number of thousands and multiplying it by the factor calculated in the previous step.

    $1.08 x 200 = $216.00

Processing a Life Insurance Premium Payment Through a Payroll.

• • 1. Go to Payroll>Payroll Payments - Current or Payroll Payments - Future.

  • 2. Click Create.

  • 3. Enter the following:

    • 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

      Payroll Payment - Future

      

      
      

      Payroll Payments - Current

      
      

      

      
      

    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.

• • 4. Complete the payroll.

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.

• • 1. Go to Core>Adjustments.
  • 2.  Click Create.
  • 3.  Enter the Employee, Payroll Item 001, Type of Life Insurance, a Transaction Date, Amount equaling the life insurance calculation previously done and a Description for future reference.

  • 4.  Click Save.

Medicare Paid by Employee and Board

• • 5.  Medicare withholding must be paid.  Create adjustments for the Medicare payroll item(s). Board will need to pay for both Employee and Employer portion of Medicare and employee can reimburse the district.

• • • 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.
      • Enter the Employee, Payroll Item 692, Type of Amount Withheld, a Transaction Date, Amount equaling the calculated Medicare amount, and a Description for future reference.
      • Click Save.
      • Go to Core>Adjustments.
      • Click Create.
      • Enter the Employee, Payroll Item 692, Type of Board's Amount pf payroll item, a Transaction Date, Amount equaling the calculated Medicare amount, and a Description for future reference.

      • Click Save.

        Example

        Life Insurance amount of $100.00 x .0145 = $1.45

        $1.45 Amount Withheld for 692

        $1.45 Board's Amount of payroll item for 692

        

Full board paid Medicare

• • • If the Medicare is fully board paid (referred to as Medicare Pickup), then the following adjustment will need to be created: 
      • Go to Core>Adjustments.  
      • Click Create.
      • Enter the Employee, Payroll Item 692, Type of Board's Pickup Amount of Payroll Item, a Transaction Date, Enter the Amount of the board pickup, and a Description for future reference.
      • Save.
      • Click Create.
      • Enter the Employee, Payroll Item 692, Type of Board's Amount of payroll item, a Transaction Date, Amount equaling the calculated Medicare amount, and a Description for future reference.
      • Save.
      • Click Create.
      • Enter the Employee, Payroll Item 692, Type of Applicable Gross, a Transaction Date, Enter the Amount of the Life Insurance, and a Description for future reference.

      • Save.

        Example

        Life Insurance cost is $100.00

        $100.00/ 98.55% = $101.47 Applicable Gross.

        $101.47 (life insurance) x .029 (.0145 x 2) = $2.94 Medicare Pickup Amount.

        $1.47 for each the Employee (being paid by the board as pickup) and Employer amount. 

        $101.47 - $100.00 = $1.47 Applicable Gross Adjustment

        $1.47 Is the amount of the Board's Pickup Amount of the Payroll Item.  This will update both Medicare Pickup for $1.47 and Medicare for $1.47 on the Employee's W2.

        $1.47 Is the amount of Board's Amount of payroll item.  This will update the 941 Quarter report 'QTD Employer's Medicare Contribution.' 

        $1.47 Is the amount of Applicable Gross. This will update the employee's W2 Taxable Gross for Medicare.

        Adjustment records needs to be created for all adjustments: