Understanding the FICA Tax Rate on Imputed Income from Life Insurance

What Is Imputed Income From Life Insurance?

Imputed income is the taxable value of a company‑provided benefit that an employee would have to pay for out of pocket. When an employer pays the premiums on a group term life insurance policy and the coverage exceeds $50,000, the IRS treats the excess amount as imputed income to the employee.

How Does FICA Tax Work?

FICA (Federal Insurance Contributions Act) tax funds Social Security and Medicare. For 2024, the combined rate is 7.65% on wages: 6.2% for Social Security on the first $168,600 of earnings and 1.45% for Medicare on all earnings. Both the employee and employer each pay the full 7.65%.

When Is Imputed Income Subject to FICA?

Imputed income from group term life insurance is treated like regular wages for FICA purposes. If the employer includes the imputed amount on the employee's Form W‑2 in box 1 (wages, tips, other compensation), it must also be reported in box 3 (Social Security wages) and box 5 (Medicare wages). Consequently, the employee's and employer's FICA obligations increase by the same 7.65% on that amount.

Calculating the Imputed Income Amount

The IRS provides a uniform premium table to estimate the cost of $1,000 of coverage for each age bracket. Multiply the excess coverage (coverage amount minus $50,000) by the per‑$1,000 rate for the employee's age, then divide by 1,000.

Example Calculation

• Employee age: 45
• Coverage provided: $200,000
• Excess coverage: $200,000 – $50,000 = $150,000
• IRS rate for age 45 (2024): $0.15 per $1,000
• Imputed income = ($150,000 ÷ 1,000) × $0.15 = $22.50 per year

That $22.50 is added to the employee's taxable wages and is also subject to FICA at 7.65%.

FICA Tax Impact on Payroll

Using the example above, the additional FICA tax would be:

The employer matches this amount, so the total payroll tax increase is $3.46.

Reporting Requirements for Employers

Employers must:

• Calculate imputed income using the IRS table each year.
• Report the amount in box 1, box 3, and box 5 of Form W‑2.
• Withhold the appropriate employee FICA from the paycheck.
• Pay the employer's share of FICA on the same amount.

Failure to report or withhold correctly can result in penalties and interest.

Special Situations

Highly compensated employees: The same rules apply, but the imputed amount may push total wages into higher Social Security taxable limits.

Medicare surtax: If an employee's combined wages (including imputed income) exceed $200,000, an additional 0.9% Medicare surtax applies to the employee only.

State taxes: Some states treat imputed income as taxable income for state income tax purposes, but they do not apply FICA.

Key Takeaways

• Imputed income from group term life insurance > $50,000 is taxable for both income tax and FICA.• The FICA rate remains the standard 7.65% (6.2% Social Security + 1.45% Medicare) for both employee and employer.• Use the IRS uniform premium table to calculate the imputed amount each year.• Employers must report the amount on the W‑2 and withhold/pay the corresponding FICA.