Are Company Paid Insurance Premiums Taxable Income?

If a company provides benefits to its employees, the business might also be providing taxable income that employees must report to the Internal Revenue Service. This would include any kind of insurance -- with any coverage amount -- with the exception of those insurance policies the IRS specifically classifies as "exempt."

Group Term Life Insurance

For group term life insurance, the IRS sets $50,000 in face value as the boundary for a taxable benefit. If the premium paid by the employer buys an insurance policy above that amount, the benefit is subject to payroll taxes. That means the IRS requires the employer to report the benefit as wage income and withhold payroll taxes, for the cost of life insurance coverage in excess of $50,000. Otherwise, life insurance premiums are exempt from income tax. Premiums that you pay on your own for life insurance are never deductible.

Accident and Health

The IRS also exempts accident and health insurance premiums paid by the employer, with the exception of long-term care insurance provided in a tax-sheltered plan, such as a flexible spending account. This type of insurance covers costs associated with assisted-living facilities or residential care for the disabled. The cost is subject to income tax but not payroll taxes for Social Security and Medicare purposes.

COBRA Premiums

The exemption also applies if you are paying COBRA health premiums for a former employee. There are no conditions on this "continuation" coverage; the employee can exempt the premiums whether he quit or is going through a temporary layoff, or whether he was a permanent or temporary worker.

Key Employees

The IRS makes an exception for employees who own more than 2 percent of the stock of an S corporation. For these employees, any premiums paid for accident or health insurance (or life insurance) are subject to income tax and withholding. The benefit is not subject to payroll taxes for Social Security and Medicare, unless the employer compensated the employee for a specific illness or injury. The same exception applies to "highly compensated employees," by the IRS definition. This means a corporate officer who earns among the five highest salaries, any employee who owns more than 10 percent of the stock, or any employee earning in the top 25 percent of company salaries.

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About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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