Payroll Articles
Earned Income Credit
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 2004 in their paychecks throughout the year, instead of waiting
until they file their 2004 tax returns. To be eligible for this
AdvanceEIC 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 current year Form W-5.
You are required by law to make advance payments to most eligible
Employees who provide the form. The 2004 Form W-5 is valid only
for the current year. 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 Employee's pay, use either the Tables for Percentage Method or Tables for Wage Bracket Method of AdvanceEIC 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 theEIC 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 (PDF), Form 943 (PDF), or Schedule H of Form 1040 (PDF),
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.