An employee who expects to be eligible for the earned income credit (EIC) and expects to have a qualifying child is entitled to receive EIC payments with his or her pay during the year. To get these payments, the employee must provide to you a properly completed Form W-5 (or Formulario W-5(SP), its Spanish translation), Earned Income Credit Advance Payment Certificate, using either the paper form or an approved electronic format. You are required to make advance EIC payments to employees who give you a completed and signed Form W-5. You may establish a system to electronically receive Forms W-5 from your employees. See Announcement 99-3 for information on electronic requirements for Form W-5. You can find Announcement 99-3 on page 15 of Internal Revenue Bulletin 1999-3 at www.irs.gov/pub/irs-irbs/irb99-03.pdf
Certain employees who do not have a qualifying child may be able to claim the EIC on their tax return. However, they cannot get advance EIC payments.
For 2010, the advance payment can be as much as $1,830. The tables that begin on page 62 reflect that limit.taxmap/pubs/p15-012.htm#en_us_publink1000202415
Form W-5 explains the eligibility requirements for receiving advance EIC payments. On Form W-5, an employee states he or she expects to be eligible to claim the EIC and shows whether he or she has another Form W-5 in effect with any other current employer. The employee also shows the following:
- Whether he or she expects to have a qualifying child.
- Whether he or she will file a joint return.
- If the employee is married, whether his or her spouse has a Form W-5 in effect with any employer.
An employee may have only one certificate in effect with a current employer at one time. If an employee is married and his or her spouse also works, each spouse should file a separate Form W-5.taxmap/pubs/p15-012.htm#en_us_publink1000202416
Form W-5 is effective for the first payroll period ending on or after the date the employee gives you the form (or the first wage payment made without regard to a payroll period). It remains in effect until the end of the calendar year unless the employee revokes it or files another one. Eligible employees must file a new Form W-5 each year.taxmap/pubs/p15-012.htm#en_us_publink1000202417
If an employee gives you a signed Form W-5 and later becomes ineligible for advance EIC payments, he or she must revoke Form W-5 within 10 days after learning about the change of circumstances. The employee must give you a new Form W-5 stating he or she is no longer eligible for or no longer wants advance EIC payments.
If an employee's situation changes because his or her spouse files a Form W-5, the employee must file a new Form W-5 showing his or her spouse has a Form W-5 in effect with an employer. This will reduce the maximum amount of advance payments you can make to that employee.
If an employee's spouse has filed a Form W-5 that is no longer in effect, the employee may file a new Form W-5 with you, but is not required to do so. A new form will certify the spouse does not have a Form W-5 in effect and will increase the maximum amount of advance payments you can make to that employee.taxmap/pubs/p15-012.htm#en_us_publink1000202418
The Form W-5 is invalid if it is incomplete, unsigned, or has an alteration or unauthorized addition. The form has been altered if any of the language has been deleted. Any writing added to the form other than the requested entries is an unauthorized addition.
You should consider a Form W-5 invalid if an employee has made an oral or written statement that clearly shows the Form W-5 to be false. If you receive an invalid form, tell the employee it is invalid as of the date he or she made the oral or written statement. For advance EIC payment purposes, the invalid Form W-5 is considered void.
You are not required to determine if a completed and signed Form W-5 is correct. However, you should contact the IRS if you have reason to believe it contains an incorrect statement.taxmap/pubs/p15-012.htm#en_us_publink1000202419
To figure the amount of the advance EIC payment to include with the employee's pay, you must consider:
- Wages, including reported tips, for the same period. Generally, figure advance EIC payments using the amount of wages subject to income tax withholding. If an employee's wages are not subject to income tax withholding, use the amount of wages subject to withholding for social security and Medicare taxes.
- Whether the employee is married or single.
- Whether a married employee's spouse has a Form W-5 in effect with an employer.
Do not consider combat zone pay received by the employee and excluded from income as earned income when figuring the advance EIC payment.
Figure the amount of advance EIC to include in the employee's pay by using the tables that begin on page 62. There are separate tables for employees whose spouses have a Form W-5 in effect. See page 38 for instructions using the advance EIC payment tables.
The amount of advance EIC paid to an employee during 2010 cannot exceed $1,830. For example if during the year you have paid an employee with one child total wages of at least $35,535 ($40,545 if married filing jointly), you must also stop making advance EIC payments to that employee for the rest of the year.
An advance EIC payment is not subject to withholding of income, social security, or Medicare taxes. An advance EIC payment does not change the amount of income, social security, or Medicare taxes you withhold from the employee's wages. You add the EIC payment to the employee's net pay for the pay period. At the end of the year, you show the total advance EIC payments in box 9 on Form W-2. Do not include this amount as wages in box 1.taxmap/pubs/p15-012.htm#en_us_publink1000202422
Show the total payments you made to employees on the advance EIC payments line (line 9) of your Form 941 (line 8 of Form 944). Subtract this amount from your total taxes on line 8 (line 7 of Form 944). See the separate Instructions for Form 941 (or the separate Instructions for Form 944). Reduce the amounts reported on line 17 of 2009 Form 941 (line 15 of Form 944) or on appropriate lines of Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, by any advance EIC paid to your employees.
Generally, employers will make the advance EIC payment from withheld income tax and employee and employer social security and Medicare taxes. These taxes are normally required to be paid over to the IRS either through federal tax deposits or with employment tax returns. For purposes of deposit due dates, advance EIC payments are treated as deposits of these taxes on the day you pay wages (including the advance EIC payment) to your employees. The payments are treated as deposits of these taxes in the following order: (1) income tax withholding, (2) withheld employee social security and Medicare taxes, and (3) the employer's share of social security and Medicare taxes.taxmap/pubs/p15-012.htm#en_us_publink1000202423
You have 10 employees, each entitled to an advance EIC payment of $10. The total amount of advance EIC payments you make for the payroll period is $100. The total amount of income tax withholding for the payroll period is $90. The total employee and employer social security and Medicare taxes for the payroll period is $122.60 ($61.30 each).
You are considered to have made a deposit of $100 advance EIC payment on the day you paid wages. The $100 is treated as if you deposited the $90 total income tax withholding and $10 of the employee social security and Medicare taxes. You remain liable for depositing the remaining $112.60 of the social security and Medicare taxes ($51.30 + $61.30 = $112.60).taxmap/pubs/p15-012.htm#en_us_publink1000202424
For any payroll period, if the total advance EIC payments are more than the total employment taxes (withheld income tax and both employee and employer shares of social security and Medicare taxes), you may choose either to:
- Reduce each employee's advance payment proportionally so that the total advance EIC payments equal the amount of taxes due or
- Make full payment of the advance EIC and treat the excess as an advance payment of employment taxes.
You have 10 employees who are each entitled to an advance EIC payment of $10. The total amount of advance EIC payable for the payroll period is $100. The total employment tax for the payroll period is $90 (including income tax withholding and social security and Medicare taxes). The advance EIC payable is $10 more than the total employment tax. The $10 excess is 10% of the advance EIC payable ($100). You may—
- Reduce each employee's payment by 10% (to $9 each) so the advance EIC payments equal your total employment tax ($90) or
- Pay each employee $10, and treat the excess $10 as an advance payment of employment taxes. See the Instructions for Form 941 (or the Instructions for Form 944) for reporting details.
If you are in American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, or the U.S. Virgin Islands, consult your local tax office for information on the EIC. You cannot take advance EIC payments into account on Form 941-SS or Form 944-SS.taxmap/pubs/p15-012.htm#en_us_publink1000202427
You must notify employees who have no federal income tax withheld they may be able to claim a tax refund because of the EIC. Although you do not have to notify employees who claim exemption from withholding on Form W-4 about the EIC, you are encouraged to notify any employees whose wages for 2009 were less than $43,352 ($48,362 if married filing jointly) they may be eligible to claim the credit for 2010. This is because eligible employees may get a refund of the amount of EIC that is more than the tax they owe.
You will meet this notification requirement if you issue the employee Form W-2 with the EIC notice on the back of Copy B, or a substitute Form W-2 with the same statement. You will also meet the requirement by providing Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), or your own statement that contains the same wording.
If a substitute for Form W-2 is given to the employee on time but does not have the required statement, you must notify the employee within 1 week of the date the substitute for Form W-2 is given. If Form W-2 is required but is not given on time, you must give the employee Notice 797 or your written statement by the date Form W-2 is required to be given. If Form W-2 is not required, you must notify the employee by February 8, 2010.