What is the Earned Income Credit (EIC)?
The EIC is a tax credit provided to help offset the basic
living expenses (including FICA taxes) of low income employees.
Who is eligible for the EIC?
To qualify for the EIC an employee:
1. With no qualifying child: (a) must have expected
1995 earned income and adjusted gross income of less than
$9,000, (b) must have lived in the US for at least 6 months,
(c) must be over age 25 but below age 65, (d) cannot be
claimed as a dependent by anyone, (e) cannot be the qualifying
dependent child of another person, (f) must have worked
and earned income even if such income is not taxable,
(g) must have a filing status other than married filing
separately, (h) must not be able to exclude any income
that is earned in foreign countries, and (i) must file
a return that covers a 12 month period; or
2. With one qualifying child: (a) must have expected 1995 earned income and
adjusted gross income of less than $24,396, (b) must have the child living
with him in the US for more than 6 months out of the year (12 months for foster
children), (c) must claim the child as a dependent, (d) whose qualifying child
cannot be the qualifying child of another person whose adjusted gross income
is more than his, and (e) requirements (e) through (i) under number 1 above.
3. With more than one qualifying child: (a) must have expected 1995 earned
income and adjusted gross income of less than $26,673, and (b) requirements
(b) through (h) under number 2 above.
Who is a qualifying child?
A qualifying child: (a) is the employee's child, adopted child,
stepchild, foster child, or a descendant of his child or adopted
child, (b) is under age 19 or is a full time student under age
24 or is permanently and totally disabled, and (c) lived with
the employee in the US for more than 6 months out of the year
(12 months for foster children) or was born, or died, during
the year and the employee's home in the US was the child's home
for its entire life.
How does an eligible employee claim the EIC?
The EIC may be claimed as a direct offset to an employee's income
tax liability on his Form 1040. The EIC may lead to a refund
even if no income tax was withheld or owed.
An employee with at least one qualifying child may also be eligible
for advance payments of the EIC.
Do I, as an employer, have any responsibilities related to the
EIC?
You must notify employees whose wages are not subject to federal
income tax withholding (unless they are exempt because they did
not incur any liability for the previous year and expect to incur
no liability for the current year) that they may be eligible
for a refund as a result of the EIC. You might also want to notify
employees making less than $26,673 that they might be eligible.
Notification may be made by providing to the employee: (a) Form
W-2, Wage and Tax Statement, (b) Notice 797, Possible Federal
Tax Refund Due to the Earned Income Credit (EIC), or (c) a written
statement equivalent to Notice 797. The posting of Notice 797
on an employee bulletin board is not considered sufficient notification.
How do I make advance payments of the EIC to an employee?
Obtain Form W-5, Earned Income Credit Advance Payment Certificate,
from the employee. To elect the credit, the employee must give
you a signed Form W-5 indicating that he expects to be eligible
for the credit, whether he is married, and whether his spouse
has a Form W-5 in effect with an employer. Form W-5 must be renewed
annually by January 1. You must discontinue advance payments
if a new Form W-5 is not submitted for the year. Employees not
currently receiving advance payments may file Form W-5 at any
time during the year.
Determine the employee's wages. Wages are generally payments
subject to FIT withholding or FICA taxes (including tips). Employees
not subject to FIT or FICA withholding are not entitled to advance
payments.
Determine the amount of the advance payment. Once you know an
employee's wages, the relevant pay period, and whether a married
employee's spouse has a Form W-5 in effect, you may use tables
provided by the IRS for determining the amount of the advance
payment. Tables are also printed in Circular E.
Add the advance payment to the employee's pay check. The amount
of the advance payment is added to the employee's net pay; the
advance payment is not compensation for services and does not
change the amount of income or FICA taxes that are withheld for
the employee.
What do advance payments cost me?
Advance payments are deducted from your deposit of FIT and FICA
withholdings and taxes and so involve no out of pocket cost to
you.
