Whether any company-provided life insurance you receive is taxable depends on the type, the amount and the beneficiaries of the insurance proceeds. Besides income tax withholding, there might also be Social Security, Medicare and federal unemployment tax withholding. Company-provided group term life insurance generally qualifies for the IRS income tax exclusion that applies to other company benefits. However, there are some limitations, exclusions and exceptions that apply.
Term Life Insurance Coverage
Group term life insurance is the most common type of coverage that is exempt from personal income taxation. However, group term coverage in excess of $50,000, according to the IRS, is considered taxable income to the employee based on the added premium cost and must be reported to the IRS. Should term insurance be offered, but not through a group policy, the cost of the full value of coverage is considered employee taxable income.
Permanent Life Insurance
Premiums for permanent life insurance owned by the employer are not taxable income for employees. The benefits paid to the company upon your demise are free of federal income tax. However, if the deceased employee's beneficiaries receive the benefits, they are subject to federal income taxes to those beneficiaries, according to the IRS.
The amount of coverage you receive from the employer under group term life coverage has consequences to other federal taxes besides income tax. Up to the first $50,000 of group term coverage, employees are exempt from all federal taxes. Should employees have coverage over $50,000, they are subject to Social Security and Medicare taxes but remain exempt from federal withholding and federal unemployment taxes.
Group Coverage Requirements
Tax exemptions do not apply to group coverage that does not offer general death benefits. According to the IRS, this means that similar derivative insurance, such as coverage for travel or accidental death benefits only, does not qualify for the overall tax exemption. Life policies must be available to all employees, not just the business owner and top managers, to qualify for tax exemption. Individual coverage typically generates taxable income for the policy holder.
Employee Size Requirements
The IRS rule regarding group term life insurance tax exemptions requires that your employer offer coverage to at least 10 employees during a year. Employers can count those employees who choose not to receive this coverage. The IRS allows employers some exceptions -- all of which must be met -- to this general rule. First, if evidence of insurability is required, only a medical questionnaire, not a physical, can be requested. Second, the employer provides group insurance to all full-time employees. Third, premiums and coverage are based on a uniform percentage of pay or insurer standard coverage brackets.
Even for coverage in excess of $50,000, an employee's taxable income amount is reduced by any contributions the employee makes to insurance premiums. The excess premiums, less employee contributions, must be included in the employee's annual W-2 form. The IRS has a formula to calculate the additional income that is reported to the employee. The formula has a cost per $1,000 of the extra coverage, which varies with the employee's age.