Reporting Taxable Amount of Life Insurance Premiums

1 Processing a Life Insurance Premium Payment Through a Payroll.
2 Processing a Life Insurance Premium Payment That Was Not Processed Through Payroll
- 2.1 Option 1- Medicare Paid by Employee and Board
- 2.2 Option 2 -Full Board Paid Medicare

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.

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.

Processing a Life Insurance Premium Payment Through a Payroll.

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

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

Example of Payroll Payments-Future entry:

Example of Payroll Payments-Current Pay entry:

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, click Create

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

Option 1- Medicare Paid by Employee and Board

2. 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
  - 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

2. If the Medicare is fully board paid (referred to as Medicare Pickup), then the following adjustment will need to be created. Medicare withholding must be paid. The Board will need to pay for both Employee and Employer portion of 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.