Publication 15 |
2000 Tax Year |
Chapter 10 Advance Earned Income Credit (EIC) Payment
An employee who is eligible for the earned income credit (EIC) and
has 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, Earned Income
Credit Advance Payment Certificate, using either the paper form or
using 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 Form W-5
from your employees. See Announcement 99-3 (1999-1 C.B. 272) for
information on electronic requirements for Form W-5.
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 2001, the advance payment can be as much as $1,457. The tables
that begin on page 56 reflect that limit.
Form W-5.
Form W-5 states the eligibility requirements for receiving advance
EIC payments. On Form W-5, an employee states that 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 has a qualifying child.
- Whether he or she is married.
- 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.
Length of effective period. 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.
Change of status.
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 that 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 that 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 that 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.
Invalid Form W-5.
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 that 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 has any incorrect statement.
How to figure the advance EIC payment.
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 pay period.
- Whether the employee is married or single.
- Whether a married employee's spouse has a Form W-5 in effect
with an employer.
Note:
If during the year you have paid an employee total wages of at
least $28,281, you must stop making advance EIC payments to that
employee for the rest of the year.
Figure the amount of advance EIC to include in the employee's pay
by using the tables that begin on page 56. There are separate tables
for employees whose spouses have a Form W-5 in effect. See page 33 for
instructions on using the advance EIC payment tables. The amount of
advance EIC paid to an employee during 2001 cannot exceed $1,457.
Paying the advance EIC to employees.
An advance EIC payment is not wages and 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.
Employer's returns.
Show the total payments you made to employees on the advance EIC
line of your Form 941. Subtract this amount from your total taxes (see
the separate Instructions for Form 941). Reduce the amounts
reported on line 17 of Form 941 or on appropriate lines of
Schedule B (Form 941), Employer's Record of Federal Tax
Liability, by any advance EIC paid to 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
considered deposited on the day you pay wages (including the advance
EIC payment) to your employees. The advance EIC payment reduces, in
this order, the amount of income tax withholding, withheld employee
social security and Medicare taxes, and the employer's share of social
security and Medicare taxes.
Example:
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, and you subtract this amount from
your employment taxes for the payroll period. The $100 is treated as
if you paid the IRS the $90 total income tax withholding and $10 of
the employee social security and Medicare taxes. You remain liable
only for $112.60 of the social security and Medicare taxes ($51.30 +
$61.30 = $112.60).
Advance EIC payments more than taxes due.
For any payroll period, if the total advance EIC payments are more
than the total payroll 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
- Elect to make full payment of the advance EIC and treat the
excess as an advance payment of employment taxes.
Example:
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. Attach a statement to Form 941
showing the excess advance EIC payments and the pay period(s) to which
the excess applies.
U.S. territories.
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.
Required Notice to Employees
You must notify employees who have no income tax withheld that 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, Employee's Withholding Allowance Certificate,
about the EIC, you are encouraged to notify any employees whose wages
for 2000 were less than $31,152 that they may be eligible to claim the
credit for 2000. This is because eligible employees may get a refund
of the amount of EIC that is more than the tax they owe. For example,
an employee who had no tax withheld in 2000 and owes no tax, but is
eligible for a $790 EIC, can file a 2000 tax return to get a $790
refund.
You will meet this notification requirement if you issue the IRS
Form W-2 with the EIC notice on the back of Copy B, or a substitute
Form W-2 with the same statement. You may 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 Form W-2 is given on time but does not have the
required statement, you must notify the employee within 1 week of the
date the substitute 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 7,
2001.
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