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Group Term Life Imputed Income

Employee placed on inactive status end of last year and this year the group term life imputed is calculating FICA taxes and generating W-2 just for this earning.
HR said employee in the process of to be placed on long term disability that is paid by third party.
The group term life should be deactivated not to calculate tax and not to generate W-2 in 2020 , what do you advice?

Comments

  • Excess group term life is still taxable as wages even though not an active employee. This is true for retirees - they get a W-2 for the GTL and FICA is not withheld because there are no cash wages from which to withhold FICA. There are W-2 Box 12 codes for those unwithheld taxes. the employee reports them as additional tax on the employee's tax return - the only other thing that works like that is unwithheld SS and Med taxes on tips. See page 34 of Pub 15 Adjustment of tax on group-term life insurance premiums paid for former employees.

  • The decision of or senior management is to gross up the GTL for social security and medicare taxes. Reporting in Box 1, 3,4,5,6 along with any state and local wage reporting as needed. We do not gross up or report withholding taxes.

  • limo19limo19 ✭✭

    On Pub 15 it stated Adjustment of tax on group-term life insurance pre-miums paid for former employees. The employee share of social security and Medicare taxes for premiums on group-term life insurance over $50,000 for a former employee is paid by the former employee with his or her tax return and isn't collected by the employer.
    In this case the unpaid employee did not have wages for the year and no W-2 should be generated.

  • "In this case the unpaid employee did not have wages for the year and no W-2 should be generated."

    This is not correct - the employer provided excess GTL is considered taxable "wages" and should be reported on a W-2. Note that the definition of wages includes fringe benefits and not just cash wages. In your case, the GTL is a taxable fringe benefit arising out of the employment relationship and is considered taxable wages.
    Take a look a the Form W-2 (2020) instructions:

    Page 10:
    Group-term life insurance. You must include in boxes 1, 3, and 5 (or 14, if railroad retirement taxes apply) the cost of group-term life insurance that is more than the cost of $50,000 of coverage, reduced by the amount the employee paid toward the insurance. Use Table 2-2 in Pub. 15-B to determine the cost of the insurance. Also, show the amount in box 12 with code C. For employees, you must withhold social security and Medicare taxes, but not federal income tax. For coverage provided to former
    employees, the former employees must pay the employee part of social security and Medicare taxes (or railroad retirement taxes, if applicable) on the taxable cost of group-term life insurance over $50,000 on Form 1040 or 1040-SR. You are not required to collect those taxes. However, you must report the uncollected social security tax (or railroad retirement taxes, if applicable) with code M and the uncollected Medicare tax (or RRTA Medicare tax, if applicable) with code N in box 12 of Form W-2. However, any uncollected Additional Medicare Tax (on the cost of group-term life insurance, which, in combination with other wages, is in excess of $200,000) is not reported with code N in box 12.

    Page 20:
    Code M—Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (for former employees). If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected social security or RRTA tax on the coverage in box 12. Do not include this amount in box 4.

    Code N—Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (for former employees). If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected Medicare tax or RRTA Medicare tax on the coverage in box 12. Do not show any uncollected Additional Medicare Tax. Do not include this amount in box 6.

    In other words, even if this is the only thing being reported on the W-2, you include the taxable amount of the benefit on Form W-2 - In box 1. You do not report anything in box 2 because no income tax was (or was required to be) withheld. In Box 3, include the amount of the benefit for Social Security tax purposes (this is the same amount as box 1) and nothing in box 4 because the Social Security tax was not withheld. In box 5 include the amount of the benefit for Medicare tax purposes, and nothing in box 6 because the Medicare tax was not withheld. You would also include the amount in the wage boxes for state and local taxes as applicable, but nothing in the state or local withholding boxes. You would then report the amount of Social Security tax that was not withheld in box 12 with a code M and the amount of Medicare tax that was not withheld in box 12 with a code N. The employee reports these amounts on the employee's income tax return for that year and they are included in the employee's total tax liability for that return.

    If, as Alanzawaldron described, the amount of the GTL is grossed up for taxes, then the wages to the employee include both the taxable value of the GTL and the grossed up taxes. The taxes are deemed to have been withheld and are reported in the way Alanzawaldron indicated. In that case, there were no unwithheld taxes so nothing is reported in box 12 under codes M and N. Alanzawaldron indicates that "withholding taxes" are not grossed up - I read this to mean "income tax withholding". That is correct. Income tax withholding is not required for excess GTL.

    Also see the section in the 2020 Publication 15-B on Group Term Life Insurance on page 13. It states the following with regard to who is considered an "employee" for purposes of the benefit.
    Employee. For this exclusion, treat the following individuals as employees.
    1. A current common-law employee.
    2. A full-time life insurance agent who is a current statutory employee.
    3. An individual who was formerly your employee under (1) or (2).

    Also, on pages 14 and 15 (part of that same section on GTL) , Pub 15-B states:
    Former employees. When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and isn't collected by the employer. You’re not required to collect those taxes. You must, however, pay the employer share of social security and Medicare taxes. Use the table above to determine the amount of additional income that is subject to social security and Medicare taxes for coverage provided after separation from service. Report the uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N.” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941.

    Also, the employer is liable for the employer's share of the Social Security and Medicare taxes. The employer includes the value of the excess GTL on Form 941 in the reported Social Security and Medicare wages. These amounts are multiplied by the respective tax rates for the combined employee and employer shares - 12.4% and 2.9% respectively, and those amounts are added to the employer's tax liability. However, the employee's share that was not withheld is subtracted on line 9 (Current quarter’s adjustments for tips and group-term life insurance) of the 941 to reduce the employer's liability for the amount the employee is going to report and pay on the employee's tax return.

    If it makes a difference to you, I can also provide you with a definition of wages, but I think that the information provided by the IRS in the publications and forms instructions make it pretty clear that the former employee is treated as an employee for purposes of reporting the value of excess GTL and the associated employment taxes.

  • "On Pub 15 it stated Adjustment of tax on group-term life insurance pre-miums paid for former employees. The employee share of social security and Medicare taxes for premiums on group-term life insurance over $50,000 for a former employee is paid by the former employee with his or her tax return and isn't collected by the employer."

    Be very careful when taking one sentence out of an entire paragraph (or paragraphs as in my previous post) and extrapolating that sentence to mean that because the benefit was provided to a former employee, the benefit is not reported as wages on a Form W-2. The sentence does not say that. What it means is that because there are no cash wages from which to withhold the tax, the employer does not have to collect the tax. Furthermore, the IRS has provided a means by which the former employee can pay the tax directly to the IRS instead of forcing the employer to collect it from the employee or pay the tax for the employee.

    Note that any uncollected taxes on tips are also adjusted on line 9 of Form 941. How does that happen? Well, Tips belong to the employee, and not the employer. The employer, however, must withhold taxes on tips from funds available to the employer, such as wages paid to the employee. If the amount of taxes required are more than the cash (wages or other funds provided to the employer by the employee to cover the taxes) available to the employer, the employer has uncollected taxes on the reported tips and reports them in a similar manner. Furthermore, where the employee did not report all the tips to the employer, the employee has unreported tip income on which taxes were not withheld. The employee, either voluntarily or under audit, reports those tips and pays the tax to the IRS. The IRS then sends a "notice and demand" letter to the employer and the employer pays the employer's share of the Social Security and Medicare taxes in response to the notice.

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