What Do You Need To Know About the Earned Income Credit?

Certain workers can take the earned income credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS. You may have to make advance payments of part of your household employee's EIC along with the employee's wages. You also may have to give your employee a notice about the EIC.

Advance EIC payments. You must make advance EIC payments if your employee gives you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. Use the advance EIC payment tables in Publication 15, Circular E, Employer's Tax Guide, to find out how much to pay your employee.

Reduce the social security and Medicare taxes and withheld federal income tax you need to pay to the IRS by any advance EIC payments you make. See Publication 15 for more information about making advance EIC payments.

Notice about the EIC. Copy B of the 2001 Form W-2, Wage and Tax Statement, has a statement about the EIC on the back. If you give your employee that copy by January 31, 2002 (as discussed under Form W-2, later), you do not have to give the employee any other notice about the EIC.

Otherwise, you must give your household employee a notice about the EIC, but only if you agree to withhold federal income tax from the employee's wages (as discussed under Do You Need To Withhold Federal Income Tax?, earlier) and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2001 wages are less than $31,152.

If you do not give your employee Copy B of the Form W-2, your notice about the EIC can instead be any of the following items.

1. A substitute Form W-2 with the same EIC information on the back of the employee's copy that is on Copy B of the Form W-2.
2. Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC).
3. Your own written statement with the same wording as in Notice 797.

If a substitute Form W-2 is given on time but does not have the required EIC information, you must notify the employee within one 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 about the 2001 EIC by January 31, 2002. If Form W-2 is not required, you must notify the employee by February 7, 2002.

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