When year-end is approaching, business owners must ensure that they are reporting any fringe benefits correctly on employee W-2s for tax purposes. One of these taxable fringe benefits is group term life insurance. Group term life insurance can feel simple to set up but can be overlooked when it comes time to report it correctly in payroll.
In this article, we’re going to walk through how to report group term life insurance, what makes it taxable, and how it shows up in payroll and on a W-2. We’ll break it down step by step so you understand not just what to do, but why you’re doing it. At Paper Trails, our goal is to help you feel confident and prepared, not overwhelmed.
By the time you’re done reading, you should feel much more comfortable with how life insurance interacts with payroll, the taxability of life insurance, and how to properly handle group term life insurance as a taxable fringe benefit.
Let's begin.
What is Group Term Life Insurance?
Group term life insurance is a type of life insurance employers commonly offer as part of a benefits package. Instead of each employee buying an individual policy, the employer provides coverage to a group of employees under a single policy.
If an employee passes away while covered, the policy pays a death benefit to the employee’s chosen beneficiary. Coverage typically lasts only while the employee is employed, which is why it’s considered “term” insurance.
For many employers, group term life insurance is attractive because:
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It’s relatively inexpensive
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Employees often don’t need medical exams
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It provides meaningful protection for employees and their families
From a payroll standpoint, though, the important thing to remember is that group term life insurance is a fringe benefit — and some fringe benefits are taxable.
When is Group Term Life Insurance Taxable?
This is where things usually get confusing for many business owners.
Under IRS rules, employer-provided group term life insurance is not taxable up to $50,000 of coverage. Once coverage goes over $50,000, the excess amount becomes a taxable fringe benefit for the employee.
That means:
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The first $50,000 of coverage is generally excluded from wages
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Coverage over $50,000 creates taxable income
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The taxable amount is subject to Social Security and Medicare taxes
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Federal income tax withholding is optional
It’s important to note that the taxable amount is not based on the insurance premium you pay. Instead, the IRS requires employers to use a specific age-based rate table to calculate the value of the coverage over $50,000. This calculated value is often referred to as imputed income.
Understanding the Taxability of Group Term Life Insurance
To qualify for the $50,000 exclusion, the coverage must meet IRS requirements for group term life insurance. In general, that means:
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The coverage provides a general death benefit
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It’s offered to a group of employees, not just selected individuals
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Coverage amounts are based on a formula, such as age or salary
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The employer carries or arranges the policy
If those conditions are met, only the portion over $50,000 is taxable. If not, different tax rules may apply.
There are also special situations to be aware of:
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Coverage for spouses or dependents may be excluded up to $2,000 as a de minimis benefit
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Certain owners, such as 2% shareholders in an S corporation, are treated differently
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Plans that favor key employees may trigger additional taxation
This is why group term life insurance often shows up as a question at year-end. The rules are very specific.
How to Calculate Group Term Life Insurance as a Taxable Fringe Benefit
When reporting group term life insurance, the IRS requires a specific calculation process. Here’s the simplified version.
Step 1: Determine coverage over $50,000
Take the employee’s total employer-provided life insurance coverage and subtract $50,000.
Step 2: Convert to $1,000 units
Divide the excess coverage by 1,000. The IRS rates are based on “per $1,000 of coverage.”
Step 3: Use the IRS age-based rate table
The IRS provides a table that assigns a monthly cost per $1,000 of coverage based on the employee’s age at the end of the tax year.
Step 4: Calculate monthly imputed income
Multiply the number of $1,000 units by the IRS rate for that employee’s age.
Step 5: Calculate annual imputed income
Multiply the monthly amount by the number of months the employee was covered during the year.
Step 6: Subtract employee after-tax contributions
If the employee paid for part of the coverage using after-tax dollars, subtract that amount from the total.
The result is the taxable value of the group term life insurance coverage that should be added to the employee's W-2.
IRS Table: Cost Per $1,000 of Group Term Life Insurance (Per Month)
The IRS requires employers to use the following age-based table to calculate the taxable value of group term life insurance coverage over $50,000.
| Employee Age | Monthly Cost per $1,000 of Coverage |
|---|---|
| Under 25 | $0.05 |
| 25 – 29 | $0.06 |
| 30 – 34 | $0.08 |
| 35 – 39 | $0.09 |
| 40 – 44 | $0.10 |
| 45 – 49 | $0.15 |
| 50 – 54 | $0.23 |
| 55 – 59 | $0.43 |
| 60 – 64 | $0.66 |
| 65 – 69 | $1.27 |
| 70 and older | $2.06 |
Example Calculation
Let’s look at an example, similar to what we often see from clients.
An employee is 57 years old and has employer-provided group term life insurance coverage that changed mid-year:
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6 months at $134,000
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6 months at $137,000
First, calculate the excess coverage:
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$134,000 – $50,000 = $84,000
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$137,000 – $50,000 = $87,000
Next, convert to $1,000 units:
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84 units and 87 units
At age 57, the IRS rate is $0.43 per $1,000 per month.
Monthly taxable amount:
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84 × $0.43 = $36.12
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87 × $0.43 = $37.41
Annual taxable amount:
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$36.12 × 6 months = $216.72
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$37.41 × 6 months = $224.46
Total taxable fringe benefit for the year:
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$216.72 + $224.46 = $441.18
That $441.18 is what gets added to payroll as taxable income for that employee.
Reporting Group Term Life Insurance on W-2s
Once the taxable amount is calculated, it must be reported correctly. The taxable value of group term life insurance coverage over $50,000 is:
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Included in Box 1 (Wages)
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Included in Box 3 (Social Security wages)
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Included in Box 5 (Medicare wages)
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Reported in Box 12 with Code C
It is subject to Social Security and Medicare taxes. Employers may choose whether or not to withhold federal income tax on the amount.
From a payroll processing standpoint, many employers add this as a separate earning, often labeled something like “GTL Taxable Fringe,” so it flows correctly into year-end reporting.
Avoiding Year-End Surprises
One of the biggest challenges with reporting group term life insurance is timing. If calculations are done only at year-end, it can create unexpected taxable income on an employee’s final checks.
Whenever possible, spreading the taxable amount across payrolls throughout the year helps:
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Avoid surprise tax impacts for employees
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Reduce year-end cleanup
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Lower the risk of reporting errors
Using payroll tools that automatically calculate taxable GTL each payroll can make a huge difference.
FAQs on Group Term Life Insurance
Is group term life insurance always taxable?
No, group term life insurance is not always taxable. In most cases, the IRS allows employers to provide up to $50,000 of group term life insurance coverage to an employee without it being included in taxable wages. The tax issue only comes into play when the employer-provided coverage goes over that $50,000 threshold.
Once coverage exceeds $50,000, the portion over the limit becomes a taxable fringe benefit. That taxable amount is not the full value of the extra coverage, but rather an IRS-calculated value based on the employee’s age and the length of time they were covered during the year. Understanding this distinction helps employers avoid over- or under-reporting life insurance in payroll.
Is group term life insurance a deduction or earning in payroll?
Group term life insurance over $50,000 is treated as taxable income, so it is handled as an earning in payroll, not a deduction. This is a common point of confusion, especially because employees do not receive extra cash when this income is added.
The taxable value of the coverage is added to the employee’s wages for tax purposes only. It increases the employee’s taxable income for Social Security and Medicare, even though there is no actual payout of money. From a payroll setup perspective, this is often added as a separate earning labeled something like “GTL Taxable Fringe” to ensure it flows correctly to tax reports and the W-2.
Does the taxable amount equal the insurance premium?
No, the taxable amount does not equal the insurance premium the employer pays to the insurance carrier. This is one of the biggest misunderstandings around the taxability of life insurance.
Instead, the IRS requires employers to use a standardized age-based rate table to determine the value of coverage over $50,000. These rates are often much lower than actual insurance premiums, especially for younger employees. The IRS uses this table to create consistency across employers, regardless of what a company actually pays for its group life insurance policy.
What taxes are paid on group term life insurance?
The taxable portion of group term life insurance is subject to Social Security and Medicare taxes. These taxes apply only to the value of employer-provided coverage over $50,000, as calculated using the IRS age-based rate table.
Federal income tax withholding on group term life insurance is optional. Employers may choose to withhold federal income tax on the taxable amount, but they are not required to do so. Even if federal income tax is not withheld, the taxable value must still be reported as wages on the employee’s W-2. Group term life insurance is not subject to federal unemployment (FUTA) tax. State tax treatment can vary, so employers should be aware of any state-specific rules that may apply.
Conclusion
Group term life insurance is a great benefit, but it comes with very specific payroll and tax reporting rules. Understanding the taxability of life insurance, how to calculate imputed income, and where it belongs on payroll and W-2s is key to staying compliant and avoiding last-minute stress.
If you’re unsure whether your group term life insurance is being reported correctly, it’s always better to ask sooner rather than later. A little clarity upfront can save a lot of headaches at year-end.
Written December 2025
Written by Jon Portanova
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