One of the vast number of employee perks that are offered now to draw new employees is the provision of life insurance. Most medium-to-large size companies, as well as some small businesses, provide group life insurance for workers, managers, executives and owners. Group life insurance is an inexpensive way to give employees a valuable benefit. Many people do not have life insurance so it adds to the compensation package an employer puts together.
Taxable vs. Non-taxable Life Insurance
As an employee with an employer-paid life insurance premium, you will see the premiums included on
your W-2. Because it shows up there, it is often assumed to be a taxable fringe benefit. However, this is not usually the case. As long as the policy does not exceed $50,000.00, the premiums are not considered taxable. Alternatively, if the policy exceeds the $50,000.00 threshold, anything premiums paid in excess of the $50,000 policy are counted as income and therefore taxable. This rule applies, whether or not the employee is paying for the premiums. There is one exception to this rule: if the policy is not carried by the employer, then it is not taxable, regardless of the amount. Carried by the employer simply means that the employer is paying all or part of the premiums or the employer arranges for the premium payment by financing it through fees collected from other employees.
As far as employer-provided life insurance for dependents and spouses, these are not taxable as long as they do not exceed $2,000.00. There are some exceptions to this but they are minute. Check with your tax accountant concerning this and all tax questions.
Exceptions
In terms of life insurance premium deductibility for employers, premiums can be tax-deductible on the first $50,000.00 of life insurance. A self-employed individual can claim the premiums as an expense as long as the business is not the stated beneficiary and the insured individual is an employee or corporate officer. Deferred compensation or executive bonuses may be a better means to claim a tax deduction as a self-employed individual. In no circumstances are life insurance premiums deductible for an individual taxpayer as they are deemed a personal expense.
Does Death Benefit Affect Life Insurance’s Taxability?
Do not confuse the taxability of the premiums with tax laws about the death benefit. This is an entirely different event but is still not taxable income when the payout goes to an individual. There are some business-related beneficiary payouts that are tax-free as well but the lines are drawn. Again, it is always important to speak with a CPA to determine tax rule exceptions.
If you have questions about the taxability of certain life insurance benefits or premiums, we can help. Our expert staff can help you understand the myriad of rules and regulations concerning tax law. Making a mistake with tax write-offs can haunt you, leading to fees and interest, so let us make sure you are on the right path. Contact us today to speak with a member at Chandler & Knowles.
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