When you have a small business, many of the expenses needed for operation (equipment, advertising, office supplies, etc.) are considered tax deductible. However, can the cost of these premiums also be written off if you provide life insurance for your employees?
In this post, we’ll explore when life insurance qualifies as a business expense and how it may impact your employees’ taxes.
When Is Life Insurance Tax Deductible?
When an individual chooses to buy their own private life insurance policy, the cost of these premiums is not tax deductible. This is because the IRS considers it to be a personal expense.
Meanwhile, many small businesses will also choose to provide life insurance as a benefit to their employees. This is a specific type of policy called group-term life insurance. In this circumstance, the cost of these premiums is tax-deductible up to $50,000 of coverage per year (source).
What Criteria Does a Business Have to Meet?
In order for the business to be eligible for this life insurance tax deduction, they must:
- Be classified as an LLC or S Corporation.
- Insure their employees or corporate officers under a group policy.
- Not list the company as the beneficiary of the group life insurance policy.
What About the Self-Employed?
Unfortunately, people who freelance or are considered self-employed cannot count the cost of life insurance as a business deduction. Since the IRS views them as individuals, these premieres are perceived as personal expenses. This is true for both sole priorities and single-person LLCs that do not have any employees.
What if the Coverage Exceeds the Allowable Amount?
Many businesses will choose to offer life insurance coverage that exceeds $50,000 of coverage. However, the IRS will consider this a taxable fringe benefit if they do. Fringe benefits are things of value that companies give to their employees outside of their paychecks, which still count as compensation, such as paid time off or a company car. In this circumstance, life insurance coverage above the IRS limit would also count as one of these taxable benefits.
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When this occurs, the cost of this additional coverage will appear on employees’ paychecks. Since it’s classified as taxable income, this benefit will result in additional federal and state taxes and FICA (i.e., Social Security and Medicare taxes).
For this reason, many employers will often limit their coverage to $50,000 and encourage the employee to seek additional coverage. Oftentimes this can be a supplementary policy that adds to the company-purchased group policy.
Of course, individuals are always free to shop for the best life insurance quotes and find a provider that suits their needs. This also opens the door to purchasing other types of policies, such as variable universal life or indexed variable universal life insurance.
The Bottom Line
Small businesses that choose to buy group term life insurance policies for their employees may deduct the cost of up to $50,000 of coverage as a business expense. However, any amount beyond this will be considered a fringe benefit, resulting in additional taxes for the employee. Therefore, it’s recommended that the employees purchase their own private or supplemental insurance policy to have all the coverage they need.