What Is Imputed Income on Life Insurance? W-2 and Tax Rules

Imputed income on life insurance is the taxable value the IRS assigns to employer-provided group-term life insurance coverage above $50,000. The first $50,000 of coverage is tax-free. Anything above that threshold produces a dollar figure that gets added to your taxable wages, even though no cash lands in your paycheck. That added amount is subject to federal income tax and to Social Security and Medicare taxes. For most workers the yearly hit is small, often under a couple hundred dollars, but the mechanics catch people off guard when they spot an unexplained figure on their W-2.

Why Coverage Above $50,000 Gets Taxed

Federal tax law lets your employer provide up to $50,000 of group-term life insurance with no tax consequences to you, as long as the policy is carried directly or indirectly by the employer. That covers the vast majority of workplace life insurance plans.¹

Once your coverage crosses that line, the IRS treats the cost of the excess as compensation. Your employer figures that cost from a standardized rate table and adds it to your taxable wages. You don’t receive extra money. The “income” is a tax concept representing the economic value of having insurance paid for on your behalf.²

How the Taxable Amount Is Calculated

The IRS doesn’t use what your employer actually pays in premiums. It publishes a uniform rate table (commonly called “Table I”) that assigns a fixed monthly cost per $1,000 of excess coverage based on your age. These rates apply regardless of what the insurance really costs your employer.

Under 25: $0.05 per $1,000
25–29: $0.06 per $1,000
30–34: $0.08 per $1,000
35–39: $0.09 per $1,000
40–44: $0.10 per $1,000
45–49: $0.15 per $1,000
50–54: $0.23 per $1,000
55–59: $0.43 per $1,000
60–64: $0.66 per $1,000
65–69: $1.27 per $1,000
70 and above: $2.06 per $1,000

Your age for Table I purposes is your age on the last day of your taxable year, which for most people means December 31.³

A Worked Example

Say you’re 52 and your employer provides $150,000 of group-term life insurance at no cost to you. The math:

Excess coverage: $150,000 minus the $50,000 exclusion = $100,000
Coverage units: $100,000 ÷ $1,000 = 100
Monthly Table I rate for age 50–54: $0.23
Monthly imputed income: 100 × $0.23 = $23.00
Annual imputed income: $23.00 × 12 = $276.00

That $276 gets added to your taxable wages for the year. In the 22% federal bracket, the extra federal income tax is about $61. Social Security and Medicare add roughly another $21. Total extra tax on $150,000 of free life insurance: around $82 for the year.²

When You Pay Part of the Premium

If you contribute toward coverage with after-tax dollars, your payments reduce the imputed income. The statute is explicit: imputed income equals the Table I cost of excess coverage minus any amount you pay toward the insurance.¹ Using the example above, paying $10 per month toward coverage would drop your annual imputed income from $276 to $156.

Where to Find It on Your W-2

Your employer reports imputed income in two places. The amount is folded into Box 1 (Wages, Tips, Other Compensation) as part of your total taxable wages. It also appears separately in Box 12 with Code C, which specifically identifies the taxable cost of group-term life insurance over $50,000.⁴

The same figure is also included in Box 3 (Social Security wages, up to the $184,500 wage base for 2026) and Box 5 (Medicare wages).⁵ Because your employer handles the reporting, you generally don’t need to do anything extra at tax time. The imputed income is already baked into the Box 1 total that flows onto your 1040. If you want to double-check, divide your Code C figure by 12, then by the Table I rate for your age, and multiply by 1,000. You should get your excess coverage amount.

Social Security and Medicare Taxes Apply Too

This is the detail most people miss. Imputed income from group-term life insurance is subject to Social Security and Medicare (FICA) taxes, not just income tax. Both you and your employer owe FICA on the imputed amount: 6.2% for Social Security (up to the wage base) and 1.45% for Medicare.² For active employees, employers collect these through normal payroll withholding.

Voluntary and Supplemental Coverage Can Still Count

Many employers offer optional life insurance employees buy with their own payroll deductions. Here’s where people get tripped up: coverage you pay for yourself can still count toward the $50,000 threshold if the underlying policy is “carried by the employer.”

A policy is carried by the employer when the employer pays any part of the cost, or when the employer arranges premium payments and at least one employee’s premium subsidizes another’s. The IRS calls that second scenario the straddle rule. If the premiums charged to employees straddle the Table I rates (some paying more, some paying less than the uniform rate), every employee’s coverage is treated as employer-carried.²

The IRS illustrates it this way: an employee gets $40,000 of employer-provided coverage and buys $100,000 of optional coverage through the same policy. Because the entire policy is employer-carried, all $140,000 counts. After the $50,000 exclusion, $90,000 generates imputed income, even though the employee paid for most of it out of pocket. If that supplemental policy weren’t considered employer-carried, the employee would owe zero imputed income.² Paying for supplemental coverage yourself doesn’t automatically keep it out of the calculation. The policy structure matters more than who writes the check.

When Imputed Income Doesn’t Apply

A handful of narrow situations eliminate imputed income entirely:

You left your employer because of a disability and the employer continues your group-term coverage. The imputed income rules don’t apply to that coverage.¹
A qualifying charity under IRC Section 170(c) is the sole beneficiary for the entire tax year.
Your employer is directly or indirectly the beneficiary (sometimes called key person insurance). That coverage is excluded from imputed income for the insured employee.¹
The policy genuinely isn’t carried by the employer. If the employer pays nothing and the premium structure involves no cross-subsidy, Section 79 doesn’t apply at all, no matter the coverage amount.²

Employer-paid life insurance on your spouse or dependents follows a different rule. As long as the face amount stays at or below $2,000, the coverage is tax-free. Only amounts above $2,000 create taxable income.²

If You’re Retired or Have Left the Employer

When a former employer keeps your group-term life insurance in place after retirement or separation, the $50,000 exclusion still applies, and coverage above that still produces imputed income. The practical wrinkle: there’s no active paycheck to withhold FICA from.

When Social Security and Medicare taxes can’t be withheld from a former employee’s pay, the employer reports the uncollected amounts on the W-2 using Box 12 Code M (uncollected Social Security tax) and Code N (uncollected Medicare tax). You’re responsible for paying those amounts when you file your return.⁴ If you’re retired and seeing Codes M and N on a W-2 from a former employer, that’s what they are, and your 1040 needs to settle them.

1
Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees
2
Internal Revenue Service. Group-Term Life Insurance
3
eCFR. 26 CFR 1.79-3 – Determination of Amount Equal to Cost of Group-Term Life Insurance
4
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
5
Social Security Administration. Contribution and Benefit Base