Notifying Employees About the Earned Income Tax Credit

Earned Income Tax Credit - Notifying Employees
Earned Income Tax Credit - Notifying Employees. Emely/Getty Images

 One of your responsibilities as an employer is notifying employees of specific tax situations that can affect them. One of these situations is notification about the earned income tax credit. 

What is the Earned Income Tax Credit? 

The Earned Income Tax Credit (EIC) is a refundable tax credit for eligible lower-income workers. This tax credit may be taken to directly reduce the person's tax liability.

Workers may still receive this credit even if their income is low enough that they don't have to file a tax return. 

Eligible employees may get a refund of the EIC amount if it is more than the tax they owe. William Perez, Tax Planning Expert, has a comprehensive article that explains the Earned Income Tax Credit. 

What is My Responsibility to Employees About This Tax Credit?

As an employer, you must notify employees about this tax credit. Specifically, the IRS requires you to notify employees who don't have federal income tax withheld, and you are encouraged to notify employees with incomes less than a specific amount each year. 

The IRS says, specifically

You must notify each employee who worked for you at any time during the year and from whose wages you did not withhold income tax. However, you do not have to notify any employee who claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate. Note: You are encouraged to notify each employee whose wages for 2015* are less than $53,267 that he or she may be eligible for the EIC.

*This wage number changes each year 

How and When to Notify Employees

There are several ways you can notify employees about the availability of this tax credit.

On the W-2 form. The easiest way to meet the notification requirement is to include a notice about the EIC on the employee's W-2 form, the wage and tax statement you provide in January of each year.

Include the notice on the back of Copy B Y (the copy that the employee files with the federal income tax return). By placing the notice on the back of Copy B, you are also notifying the IRS of your compliance with this requirement.  

On 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 IRS Form W-2.  

Providing employees with IRS Notice 797 (or a copy with this exact wording) which explains:

  • What is the Earned Income Tax Credit.
  • How to qualify this tax credit.
  • Who is a qualified child, and
  • How to claim the tax credit. 

You are in compliance with this regulation if you have provided employees with this notice on their W-2 or a substitute W-2 no later than the W-2 due date (the end of January for the preceding year). 

You must give each employee a copy of the notice in one of the ways listed above, or mail it to their last known address. You can't just post the notice on the employee bulletin board, although you can post the notice in addition to making sure each eligible employee has a copy. 

Advance Earned Income Credit

The Advance Earned Income Credit is no longer required of employers. This advance was allowed prior to 2011, as a reduction in the person's withholding.

 

More Information About the Earned Income Tax Credit

The IRS has a list of questions and answers about the Earned Income Tax Credit. 

The IRS also has a toolkit of information for you to share with employees, to explain this tax credit.