What Is Imputed Income on Life Insurance?

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 employer-provided coverage is tax-free. Anything above that produces a “cost” that gets added to your taxable wages, even though no extra money hits your paycheck. That amount is subject to federal income tax and to Social Security and Medicare taxes. For most people the annual tax bill is small, often under a couple of hundred dollars, but the figures on your W-2 can be confusing if you don’t know where they come from.

The $50,000 Tax-Free Threshold

Federal tax law lets your employer provide up to $50,000 of group-term life insurance without any tax consequence to you. The exclusion applies as long as the policy is carried directly or indirectly by your employer, which covers the vast majority of workplace plans.¹

Once coverage crosses that line, the IRS treats the cost of the excess coverage as compensation. Your employer calculates it using a fixed rate table and adds the result to your taxable wages. You never receive the money. The “income” is a tax concept representing the economic benefit of having insurance paid for on your behalf.²

How the Taxable Amount Is Calculated

The IRS ignores what your employer actually pays for the insurance. Instead, it publishes a uniform rate table (Table I) that assigns a monthly cost per $1,000 of excess coverage based on your age. Your age for this purpose is your age on the last day of the tax year, which for most people is December 31.³

The full Table I schedule:

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

A Worked Example

Suppose 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 − $50,000 = $100,000
Coverage units: $100,000 ÷ $1,000 = 100
Monthly Table I rate (age 50–54): $0.23
Monthly imputed income: 100 × $0.23 = $23.00
Annual imputed income: $23.00 × 12 = $276.00

That $276 is added to your taxable wages for the year. In the 22% federal tax bracket, the extra federal income tax comes to about $61. Social Security and Medicare add roughly $21 more. The total added tax on $150,000 of free coverage is around $82 for the year.²

If You Pay Part of the Premium

Any after-tax contributions you make toward the coverage reduce the imputed amount. The statute is explicit: imputed income equals the Table I cost of the excess coverage minus what you pay toward the insurance.¹ Using the example above, paying $10 a month toward coverage would drop the annual imputed income from $276 to $156.

Where It Shows Up on Your W-2

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

The same figure is 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 amount is already inside the Box 1 total that flows onto your 1040. Checking that your Box 12 Code C figure lines up with your coverage level is a reasonable sanity check.

Social Security and Medicare Taxes Apply Too

This is the part people miss. Imputed income from group-term life insurance is subject to FICA taxes, not just income tax. Both you and your employer owe 6.2% for Social Security (up to the wage base) and 1.45% for Medicare on the imputed amount.² For active employees, the employer collects these through normal payroll withholding, so you won’t see a separate bill.

Supplemental Coverage You Pay For Can Still Count

Many employers offer optional or supplemental life insurance that employees buy through payroll deductions. Coverage you pay for yourself can still count toward the $50,000 threshold if the underlying policy is considered “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 the 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), the whole policy is treated as employer-carried.²

The IRS uses this example: an employee has $40,000 of employer-provided coverage and buys $100,000 of optional coverage through the same policy. Because the whole 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 the coverage. If the supplemental policy had not been employer-carried, the employee would owe zero imputed income.²

The lesson: paying for supplemental coverage yourself doesn’t automatically keep it out of the calculation. The structure of the policy matters more than who writes the check.

Situations That Reduce or Eliminate Imputed Income

A handful of narrow exceptions can remove the tax altogether:

If 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
When a qualifying charity under IRC Section 170(c) is the sole beneficiary for the entire tax year, the coverage generates no imputed income.
Coverage where the employer is directly or indirectly the beneficiary (key person insurance) is excluded from imputed income for the insured employee.¹
If the policy genuinely isn’t carried by the employer, meaning the employer pays nothing and there’s no cross-subsidy between employees, Section 79 doesn’t apply and no imputed income arises regardless of the coverage amount.²

Employer-paid life insurance on your spouse or dependents follows a separate 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 No Longer With the Employer

The $50,000 exclusion continues to apply if a former employer keeps your group-term coverage in place. Anything above $50,000 still produces imputed income under the same Table I rates. What changes is the practical side: without a regular paycheck to withhold from, the employer can’t easily collect Social Security and Medicare on the imputed amount.

When those FICA taxes can’t be withheld, the employer reports the uncollected amounts on your W-2 using Box 12 Code M for Social Security and Code N for Medicare. You pay those amounts when you file your return.⁴ If you see Code M or N on your W-2 as a retiree, that’s what those figures are.

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