Skip to main content

Group term life insurance

When an employer offers group term life insurance, the first $50,000 of coverage is considered non-taxable. However, if any employees have over $50,000 of coverage, special steps must be taken to indicate that an imputed cost of coverage is appropriately taxed.

A special formula is used to determine the exact taxable amount. Please consult the IRS and Publication 15-b for details on this calculation.

To ensure that this imputed cost of coverage is taxed through payroll, we recommend adding the calculated taxable amount to the employee’s last payroll of the tax year. After calculating the amount, complete the following steps (steps 1-2 must only be completed the first year):

  1. Create a taxable benefit
  2. Add taxable benefit to employees
  3. Process payroll
  4. Create a journal entry

1. Create a taxable benefit

The first year, start by creating a district payroll item (Financials Main > Payroll > District Payroll Items > Create Payroll Item) with the following details:

  • Payroll Calculation Step: Taxable Benefit
  • Payroll Item Type: Life Insurance
  • Algorithm: Simple Amount (leave the amount blank, as it will vary by employee)
  • Vendor: You may choose the life insurance vendor or create a miscellaneous catch-all vendor to use as a placeholder. If you choose the life insurance vendor, be aware that a payroll items report with improper settings may incorrectly include the imputed taxable in displaying what was owed to the vendor.
  • Expenditures: Pick any expenditure account. Step 5 will undo any expenditures charged to this account. We recommend against leaving any placeholder dimensions.
  • Liability Account: Use any liability account. The post-tax deduction in Step 2 will reverse this liability. We recommend against leaving any placeholder dimensions.
  • Subtotals: Increase the subtotals that should be taxed.

2. Add taxable benefit to employees

The taxable benefit must be added to each employee who receives more than $50,000 of coverage. There are several ways to add employee payroll items, but the quickest would be:

  1. Go to Financials Main > Payroll > District Payroll Items
  2. Mass Add Employee Payroll Items
  3. Select the taxable benefit
  4. Apply
  5. Select the main position for each employee with over $50,000 of life insurance coverage
  6. Save

Then go to Financials Main > Employee - Single View and edit each payroll item.

  • The amount should be what you calculated for the employee using IRS guidelines in Publication 15-b.
  • Make sure the subtotals are appropriate for the employee. For example, a certified employee should not have their FICA subtotal increased by the taxable benefit.
  • Change the Pay Period Group field to Use Custom Pay Periods and select ONLY the single pay period during which this item should be used.

In subsequent years, these items will be rolled over, and the only steps necessary will be to adjust the amount and set the custom pay periods in the new year.

3. Process payroll

With the employee set up correctly, the two payroll items should appear on the payroll run as scheduled, where the taxable benefit will increase the taxes due. Process the payroll like normal, but do not pay liabilities until after you complete step 4.

4. Create a journal entry

The taxable benefit will have increased expenses and created an additional liability. To reverse that effect, create a journal entry.

To create the journal entry:

  1. Go to Financials Main > General Ledger > General Journal
  2. Click the blue plus sign and Create Journal Entry
  3. Set the Date to the same day as the payroll run
  4. Set the Payee to the same vendor that you used on the payroll items
  5. Debit the taxable benefit’s Liability account
  6. Credit the taxable benefit’s Expenditures account
  7. Save