Question

XYZ Corp pays tax-deductible insurance premiums for a key employee disability policy. What is the appropriate tax consequence?

a) Premiums are taxable income for the employee
b) Premiums are not deductible for the corporation
c) Premiums are tax-free for the employee
d) Premiums are subject to capital gains tax

Answer 1

The correct tax consequence is that the insurance premiums paid by XYZ Corp for a key employee's disability policy are considered taxable income for the employee, but are also deductible for the corporation.

Step-by-step explanation:

The appropriate tax consequence for XYZ Corp paying tax-deductible insurance premiums for a key employee disability policy is that the premiums are taxable income for the employee. According to the IRS, if an employer pays for disability insurance on behalf of an employee, those premiums are considered a taxable fringe benefit and must be included in the employee's gross income. These insurance premiums will be considered as part of the employee's compensation and therefore are subject to income tax. However, the premiums are deductible for the corporation as a business expense, thus reducing the corporation's taxable income.