Since its introduction in 1975, the Earned Income Tax Credit (EITC), which is administered by the IRS, has provided low-income workers with an opportunity to reduce the amount of taxes owed and supplement their wages. Only 75 percent of eligible individuals claimed the credit for the 2001 tax year. There are a number of changes HR staff should know about the EITC.

The Basics
The IRS encourages employers to notify all employees whose wages for 2002 were less than $34,178 that they may be eligible for the EITC. Employers are required to furnish Notice 797, You May Be Eligible for a Refund on Your Federal Income Tax Return Because of the Earned Income Tax Credit (EIC), to each employee whose wages were under the income tax withholding threshold.

The EITC is a federal income tax credit for low-income workers who are eligible for and claim the credit. The credit reduces the amount of tax an individual owes and may be returned in the form of a refund. It is intended to help offset Social Security taxes and some of the increases in living expenses.

Generally, income and family size determine the EITC amount a taxpayer can receive. Depending on their income, people who worked full or part-time for at least a portion of 2002 may be eligible for the credit. For tax year 2002, the EITC income requirements are as follows:

• Workers without a "qualifying child" who had earned income of less than $11,060 ($12,060 if married filing jointly),

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• Workers with one qualifying child who had earned income of less than $29,201 ($30,201 if married filing jointly),

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• Workers with more than one qualifying child who had earned income of less than $33,178 ($34,178 if married filing jointly).

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The EITC eligibility checklist on the last page of IRS Publication 596 may be used to quickly determine eligibility for the credit. Publication 596 also includes detailed information on the EITC. If your employees want to receive a free copy of Publication 596, they can call 1-800-TAX-FORMS (1-800-829-3676), visit www.irs.gov/eitc, or inquire at post offices and libraries.

2002 Changes to the EITC
Even though the EITC has been around for more than 25 years, Congress frequently makes changes to it. Even so, many of your employees who claimed the credit last year will be eligible for it this year. Other employees may qualify for the first time. The most significant change for tax year 2002 is the new definition of earned income.

For tax year 2002, wages, salaries, tips and other employee compensation are earned income only if they are currently included in gross income. For previous years, employee compensation not currently taxable, such as contributions to a 401(k) plan, was included in earned income. Now, if employee compensation is not currently subject to tax, it is not included in earned income.

Advance EIC
In addition to claiming the EITC when filing their 2002 tax returns, some employees may be able to increase take-home pay during 2003 at no cost to employers. Up to 15 million workers may qualify for this paycheck boost by requesting advance payments of the EITC (Advance EIC).

Eligible employees can receive a portion of the EITC as part of their paychecks throughout the year, instead of waiting until they file their 2003 tax returns. To be eligible for the Advance EIC, an employee must expect to have a qualifying child, expect to be eligible to claim the credit and expect to fall beneath certain income limits. The eligibility requirements are explained on Form W-5, Earned Income Credit Advance Payment Certificate.

Eligible employees who want the credit with their paychecks throughout the year must complete and sign a 2003 Form W-5 and give it to their employer. The law requires employers to make advance payments to eligible employees who provide the form. The 2003 Form W-5 is valid only for the 2003 calendar year.

The Advance EIC payment is added to the employee''s net pay for the pay period. Since the credit is not considered wages, employers must not withhold any income, social security or Medicare taxes from the payment. Generally, payments come out of the employee´s withheld income tax and the employee and employer portions of the social security and Medicare taxes. However, the payment doesn''t change the amount of employment taxes you 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.

Employers report Advance EIC payments made to employees by showing the total payments on the Advance EIC line of their employment tax returns. IRS Publication 15 contains specific information for employers regarding the Advance EIC.

What should you do next?
You may wish to speak with your low-income workers about the EITC. By doing so, you could help employees offset tax burdens this tax season and increase their take-home pay during 2003. Many working families struggle to make ends meet. Some of these individuals may be working at your company and be eligible for up to $4,140 of credit in tax year 2002.

The IRS offers seminars to explain the Advance EIC and the EITC. If you would like an IRS employee to speak to your payroll personnel and employees on Advance EIC and EITC, call 1-800-829-1040 for the Taxpayer Education Coordinator in your area. You also can find additional information at www.irs.gov/eitc.

Sidebar 1:

The IRS has special tools available for HR professionals including:

• Notice 1015: Have You Told Your Employees About the Earned Income Credit (EIC)? - Explains the requirement for employers to notify their employees about the EITC. Online copy available at http://www.irs.gov/pub/irs-pdf/n1015.pdf.

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• Notice 797: Possible Federal Tax Refund Due to the Earned Income Credit (EIC) - A payroll stuffer which employers may use to notify their employees about the EITC. Online copy available at http://www.irs.gov/pub/irs-pdf/n797.pdf.

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• Publication 962E: The EITC- You´ve Earned It, Why Not Claim It? - A payroll stuffer about the EITC. Order paper copies at 1-800-829-3676. For additional information about the EITC and Advance EIC visit: www.irs.gov/eitc.

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Sidebar 2:

Here are the requirements all employees must meet to qualify for the earned income credit:

• Have a valid Social Security number

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• Filing status cannot be "married filing separately"

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• Must be a U.S citizen or resident alien for all of 2002

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• Cannot file Form 2555 or 2555-EZ, pertaining to foreign earned income

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• Investment income cannot be more than $2,550

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• Must have earned income below $34,178

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• Cannot be the qualifying child of another person

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