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Did You Know: You May Owe Taxes on Your Group Life Insurance?

Did you know that employer-paid group life insurance may not really be free for employees?

When an employer offers group term life insurance, up to $50,000 of coverage is excluded from the employee’s wages, if the coverage is paid for by the employer.

Group term life insurance is a tax-free benefit as long as the death benefit is no higher than $50,000. But be aware that anything above $50,000 worth of coverage becomes “imputed income,” and is subject to both Social Security and Medicare taxes. (Employees may elect to withhold federal income tax on that amount as well.)

Figure the monthly cost of the insurance to include in the employee’s wages by multiplying the number of thousands of dollars of coverage over $50,000 (to the nearest $100) by the cost shown in the table below. For all coverage provided within the calendar year, use the employee's age on the last day of the tax year. (You must prorate the cost if less than a full month of coverage is involved.)

Cost per $1,000 of coverage per month (2022):

Age range


Age range


Under 25


















70 and older






Note: This amount must be reduced by the amount an employee pays for group life coverage, if any.

The IRS uses this example: Tom’s employer provides him with $200,000 of group life insurance coverage. Tom is 45 years old. Tom's employer must include $270 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 x 150 x 12).

Therefore, the employer includes $270 in box 1 (wages, tips), box 3 (Social Security wages), and box 5 (Medicare wages and tips) of Tom’s Form W-2. The employer also enters $270 in box 12 with code “C.”

For spouses and dependents, up to $2,000 is exempt from the employee’s taxable wages.

Like with any good rule, there are exceptions, and you can read about them here.

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