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 withheld payroll taxes. This is possible through the advance earned income credit (AEIC) program.

The earned income credit is a refundable credit for certain workers that qualify for it, and it is intended to help offset some of the increases in living expenses and social security taxes. This credit may reduce the amount of tax owed, if any, and may result in a refund to the taxpayer.

For 1997, eligible employees can receive part of their earned income credit each month as part of their paychecks throughout the year, instead of waiting until they file their 1997 tax returns. To be eligible for this AEIC payment, an employee must have a qualifying child, expect to fall within certain income limits, and meet other specific requirements, which are explained in Form W-5.

Here's how it works: First, an eligible employee who wants the credit with his or her pay must give you a completed and signed 1996 Form W-5. You are required by law to make advance payments to eligible employees who give you Form W-5. The form will give you information about the employee that you need when you figure the amount of the AEIC payment. The W-5 Form is only valid for one calendar year. If your employee expects to be eligible the following year, they must give you a new form.

Second, you figure the amount of AEIC to include with the employee's pay. To figure the credit amount, use either the Tables for Percentage Method or Tables for Wage Bracket Method of Advance EIC Payments which are in Publication 15, Circular E, Employer's Tax Guide.

Third, you add the advance payment 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. But the payment doesn't change the amount of employment taxes you would usually withhold from the employee's pay. Also, if the employee is entitled to an advance payment that is more than his or her withholding, you can make a payment to the employee, and it still won't cost you.

So how do you make AEIC payments at no cost to you? Just show the total payments you made to your employees on the advance EIC line of your employment tax return, Form 941, or 943, whichever applies, and subtract this amount from your total taxes. Publication 15 and the instructions for the form you file will give you more information. You can order copies of Form W-5 by calling 1-800-829-3676. Also, the IRS offers Outreach seminars to explain AEIC and EIC to interested groups. If you are interested in having an IRS employee speak to your payroll personnel and employees on AEIC and EIC, refer to the IRS Assistance Map to contact the Taxpayer Education Coordinator.

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