As you get ready to issue 2025 W-2s, it’s a good time to double-check one item that often causes confusion for both payroll and employees: imputed income.
In plain terms, imputed income is the dollar value of certain employer-provided benefits that the IRS treats as taxable income to the employee, even though no cash changes hands. That amount has to be added into taxable wages and reported on the W-2.
For most employer groups, imputed income shows up in three main places:
- Group term life insurance over $50,000
- Health coverage for domestic partners (and some domestic partner children)
- Disability “gross-up” arrangements
Group Term Life Insurance Over $50,000
The $50,000 exclusion rule (unchanged for 2025)
Under Internal Revenue Code §79, an employee can receive up to $50,000 of employer-provided group term life insurance with no taxable income. Anything above $50,000 is taxable based on an IRS “uniform premium” table (often called Table I or Pub. 15-B Table 2-2). IRS+1
| Age of employee (as of 12/31/2025) | Monthly cost per $1,000 of coverage over $50,000 |
|---|---|
| Under 25 | $0.05 |
| 25–29 | $0.06 |
| 30–34 | $0.08 |
| 35–39 | $0.09 |
| 40–44 | $0.10 |
| 45–49 | $0.15 |
| 50–54 | $0.23 |
| 55–59 | $0.43 |
| 60–64 | $0.66 |
| 65–69 | $1.27 |
| 70 and over | $2.06 |
Key Points:
- The $50,000 exclusion is still in place for 2025.
- You must calculate the cost of coverage over $50,000 using the IRS monthly rates per $1,000 of coverage.
- That cost is subject to Social Security and Medicare taxes, and reported as wages in boxes 1, 3, and 5, and in box 12 with code C. IRS
- IRS monthly “Table I” rates for 2025
These are the current IRS rates per $1,000 of coverage per month. The IRS has not changed these rates since they were updated in the late 1990s, and they remain the same for the 2025 tax year.
How the Calculation Works:
Step 1:
Determine the age of the employee as of the last day in the calendar year –our spreadsheet will calculate automatically.
Step 2:
Determine the amount of total life insurance coverage/volume for each employee. The life insurance volume should include any supplemental coverage paid for by the employee, whether on a pre-tax or after-tax basis (what the IRS calls the “straddle” rule).1
When determining the amount of total coverage, you will notice that the amount of total coverage will change over a period of a year. The primary reasons why the amount of total coverage may change during a year are Adjustments in pay and/or changes in the amount of life insurance coverage.
Since the total amount of coverage could change at different times during a calendar year, you will have to identify the periods of coverage and impute the taxable income for each period.
For example:
Employee is hired on 02/01/2021 at $75,000 per year
07/01/2025 this same employee received a $10,000 raise
The employer pays for the group life insurance equal to one-times earnings.
To calculate the value of the excess total coverage; an employer will have to calculate the value of this benefit over two periods of coverage.
The first period of coverage is from 01/01/2025 – 06/30/2025 (Total Coverage $75,000).
The second period of coverage is from 07/01/2025 – 12/31/2025 (Total Coverage $85,000)
Step 3:
After determining the amount of excess coverage over $50,000 for a period, divide the excess coverage by $1,000 (rounded to the nearest tenth).
Step 4:
Multiply the result by the appropriate rate (i.e., according to age) in the IRS table above.
Step 5:
The result of this calculation is the unadjusted imputed taxable income.
Group Health Plan Coverage for Domestic Partners & Their Children
Employers may have to include imputed income for federal and state tax purposes for employees who cover their domestic partners who do not qualify as “Tax Code dependents” under federal law. We strongly recommend that they talk to their payroll provider to ensure their payroll system is properly set up and that employees impacted by this should consult their tax adviser.
Key Point: If a domestic partner is not a Tax Code dependent and is enrolled in an employer group benefit plan(s), the employer should impute income to the employee equal to the fair market value (usually the premium for fully insured plans or core COBRA rate for self-funded groups)of any coverage provided that is paid for by the employer, or by the employee on a pre-tax basis. There is no imputed income on amounts that are paid by the employee on an after-tax basis.
For example:
Employee elected to cover her long-time boyfriend on her group health plan as a domestic partner, and she has $200 per bi-weekly pay period taken out of her paycheck on a pre-tax basis to cover him for medical coverage.
For 2025, the employee would have $5,200 in imputed income reported on her W-2.
Note: this imputed income issue does not apply to same-sex or opposite-sex spouses since under both federal and state tax withholding, “spouse” includes both opposite-sex and same-sex spouses who have gotten married under any state’s laws.
Disability “Gross-Up” Plan
Employers who pay disability premiums should consider imputing income for the premium amount. This allows the premium to be paid with after-tax dollars and ensures any disability benefits will be tax-free if the employee becomes disabled.
If LTD premiums are paid with after-tax employee dollars, any benefits received will not be subject to taxation. In contrast, benefits are included in taxable income to the extent they are attributable to premiums paid by the employer or paid with employee pre-tax dollars. Some employers offer arrangements under which employees can elect annually whether they or the employer will pay their LTD premiums for the upcoming year. Other employers pay the LTD premium and then impute income only for certain categories of employees (often management employees). You must discuss with your carrier how premiums will be paid before implementing such arrangements.
Disclaimer: This material is for general informational purposes only and is not intended as tax, legal, or accounting advice. The rules around imputed income, domestic partner coverage, and disability taxation are complex and may change. Employers and employees should consult with their own tax advisor, legal counsel, and/or payroll provider about how these rules apply to their specific situation. Benefits, plan designs, and tax treatment may vary by employer and by state.
