Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client who wants to pay for an employee’s life insurance under an executive bonus plan.  How much does the client need to pay the employee so that there is no out-of-pocket cost to the employee?

Answer: You’ve described a double bonus or a gross-up bonus in your question.  A bonus that is simply equal to the life insurance premium would be a single bonus.

If the premium for a life insurance policy is $1,000, if the employer makes a single bonus of the premium, the bonus amount would be $1,000.  The employee would be responsible for the income tax on the bonus.  If the employee is in a 28% tax bracket, the employee’s tax liability would be $280.

When an employer wants to do a double bonus—that is, wants to make a bonus of a certain amount, plus enough to cover all the employee’s tax on the bonus—there’s a formula to figure out the amount that the bonus needs to be.  The formula is (net bonus desired) divided by (one minus the tax bracket).  In this case, that means the formula would be ($1,000) divided by (1-.28).  $1,000/.72 equals $1,389.

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