Under Section 79, the cost of the first $50,000 of employer-paid group term life is tax-free to an employee. Coverage above $50,000 creates imputed income, figured with the IRS Table I rate for the employee's age (not your actual premium), reduced by anything the employee pays after tax. It goes in W-2 boxes 1, 3 and 5 and is shown in box 12 with code C. It is subject to Social Security and Medicare tax; federal income tax withholding on it is optional. Example: a 52-year-old with $150,000 of coverage has $276 of imputed income for the year.
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We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
How the calculation works
- Find the coverage over $50,000. An employee with $150,000 of employer-provided group term life has $100,000 of excess coverage, or 100 units of $1,000.
- Look up the Table I rate for the employee's age on the last day of the tax year.
- Multiply units x rate x months of coverage.
- Subtract any after-tax premiums the employee paid for the group coverage.
Age 52 on December 31, $150,000 of coverage all year: 100 units x $0.23 x 12 months = $276 of imputed income. If the employee paid $60 of after-tax premiums for the coverage during the year, the imputed income drops to $216.
Run any employee's numbers in the imputed income calculator.
The IRS rates
These are the uniform premiums from Treasury Regulation 1.79-3 (called Table I there, and Table 2-2 in IRS Publication 15-B), used for every employer regardless of what the coverage actually costs:
| Age at year-end | Monthly cost per $1,000 | Age at year-end | Monthly cost per $1,000 |
|---|---|---|---|
| Under 25 | $0.05 | 50 to 54 | $0.23 |
| 25 to 29 | $0.06 | 55 to 59 | $0.43 |
| 30 to 34 | $0.08 | 60 to 64 | $0.66 |
| 35 to 39 | $0.09 | 65 to 69 | $1.27 |
| 40 to 44 | $0.10 | 70 and older | $2.06 |
| 45 to 49 | $0.15 |
The rates jump after 55 and again after 65, which is why imputed income becomes noticeable for older employees with salary-multiple coverage.
Reporting and payroll taxes
- W-2: include the imputed income in box 1 (wages), box 3 (Social Security wages) and box 5 (Medicare wages), and show it in box 12 with code C.
- Social Security and Medicare: withhold and pay them on the imputed amount.
- Federal income tax: IRS Publication 15-B says you are not required to withhold income tax on it, though you may. It is still taxable income to the employee.
- Former employees: if you provide coverage over $50,000 to retirees or former employees, the imputed income is still reported, the uncollected Social Security and Medicare go in W-2 box 12 with codes M and N, and the former employee pays that share with their return.
Special cases
- More-than-2% S corporation shareholders do not get the $50,000 exclusion. Publication 15-B says the cost of all of their group-term coverage goes in W-2 boxes 1, 3 and 5, with no requirement to withhold income tax on it; it does not spell out the valuation method, so let your payroll provider handle it.
- Groups under 10 employees: the coverage must meet extra conditions to count as group-term life at all (covering all full-time employees, amounts set by a uniform percentage of pay or carrier brackets, and evidence of insurability limited to a medical questionnaire). See group life cost for small businesses.
- Key employees in a discriminatory plan: if the plan favors key employees in eligibility or benefits, key employees lose the $50,000 exclusion and are taxed on the greater of actual cost or the Table I cost.
- Spouse and dependent coverage: employer-paid dependent life up to $2,000 is a tax-free de minimis benefit; above that, the full cost (using Table I) is taxable to the employee.
- Coverage that names the employer or a charity as beneficiary is treated differently; talk to your payroll provider.
- Employee-pay-all voluntary life is generally not "carried" by the employer and creates no imputed income, unless the plan's rates straddle Table I (some employees pay less than the Table I cost and others more). See voluntary life.
Is it worth keeping coverage over $50,000?
Usually. The imputed income is small compared with buying the same coverage individually, and the employee receives a benefit worth far more than the tax. For a 45-year-old with $200,000 of coverage, imputed income is $270 a year (150 units x $0.15 x 12), costing a few dozen dollars of actual tax. Some employers let employees choose a $50,000 cap to avoid it; most employees should not take that option.
Frequently asked questions
What is box 12 code C on a W-2?
It shows the taxable cost of group term life insurance over $50,000. The same amount is already included in boxes 1, 3 and 5, so code C is informational.
Do I pay Social Security tax on group term life imputed income?
Yes. Imputed income from coverage over $50,000 is subject to Social Security and Medicare tax. Employers are not required to withhold federal income tax on it, but it is still taxable income.
Why is imputed income based on Table I and not the real premium?
Section 79 and its regulations use a uniform table so the taxable amount is the same for every employer. Your actual group premium may be higher or lower than the Table I cost.
Can an employee avoid imputed income?
An employee can decline coverage above $50,000 if the plan allows, or pay for the excess with after-tax contributions, which reduce the imputed income. For most employees the tax is small compared with the value of the coverage.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.