Rev. date: 09/2006
Would you like to help your employees increase their take–home pay at no cost to you? You can do this by giving eligible employees part of the earned income credit with their pay and subtracting the payments you make from payroll taxes. This is possible through the Advance Earned Income Credit (Advance EIC) program.
The earned income credit is a refundable credit for certain qualified workers. It is intended to help offset some of the increases in living expenses and social security taxes. This credit reduces the amount of tax owed, if any, and may result in a refund to the taxpayer.
Eligible employees can receive part of their earned income credit for current year in their paychecks throughout the year, instead of waiting until they file their tax returns. To be eligible for this Advance EIC payment, an employee must expect to have a qualifying child, expect to fall within certain income limits, and expect to meet other specific requirements, which are explained on Form W-5, Earned Income Credit Advance Payment Certificate
, and in more detail in Publication 596
, Earned Income Credit
Here's how it works: An eligible employee who wants the credit with his or her pay must give you a completed and signed Form W-5
. You are required by law to make advance payments to most eligible employees who provide the form. If your employee expects to be eligible the following year, he or she must give you a new form.
To figure the amount of credit to include with the employees' pay, use the Tables for Percentage Method or Tables for Wage Bracket Method of Advance EIC Payments in Publication 15
, (Circular E), Employer's Tax Guide.
The advance payment is added to the employee's net pay for the pay period. Since the EIC isn't wages, you don't withhold any income, social security, or Medicare taxes from the payment. Generally, you make the advance payments from withheld income tax and employee and employer social security and Medicare taxes. However, the payment doesn't change the amount of employment taxes you would usually withhold from the employee's pay. If the employee is entitled to an advance payment that is more than his or her withholding, you can still make a payment to the employee.
You report the payments you made to your employees by showing the total payments on the advance EIC line of your employment tax return, Form 941
, Form 943
, Form 944
or Form 1040 (Schedule H)
, whichever applies, and subtract this amount from your total employment taxes. Publication 15, and the specific instructions for the form you file, will give you more information.
The IRS offers Outreach seminars to explain Advance EIC and EIC to interested groups. If you are interested in having an IRS employee speak to your payroll personnel and employees on Advance EIC and EIC, call 800–829–1040, and ask for the Taxpayer Education Coordinator for your area.