Page 149 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
Example. Group term insurance in the amount of $80,000 is pur-
chased for a 54-year-old employee, who contributes $2 per month to
this benefit. The first $50,000 of this amount is excluded from the
employee’s gross income. To calculate the value of the remaining

$30,000, divide it by 1,000 and multiply the result by $0.23 (as taken
from the table in Exhibit 5.1 for the 50–54 age bracket), which yields a
fair value of $6.90 per month.Then subtract the employee’s $2 monthly
contribution to arrive at a net monthly value received of $4.90. Next
multiply the monthly value of $4.90 by 12 in order to obtain the full-
year value of the life insurance, which is $58.80. The $58.80 should be
reported as the employee’s gross income.

The preceding scenario does not apply if the employer is the ben-
eficiary of the life insurance. This would not be a benefit to the
employee, and therefore its fair value should not be included in his or
her gross income.

I N THE REAL WORLD

Route Recommendations
through Your Auditors

The controller of a private, family-owned business was concerned
about the family’s reaction if he took a hard stand on reporting a
number of expenses as gross income to the family members, since
the family had a history of reacting poorly to these suggestions.
Specific issues were extensive personal use of company cars and
club memberships, as well as large amounts of life insurance on
family members paid for by the company. The controller asked the
external auditors for advice, and they elected to include these
issues in their management letter to the family. This step gave the
controller a source of authority for implementing the changes, which
were now grudgingly accepted by the affected family members.

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