How the EITC Affects Employers

• Letter From Bill Bolling to the Atlanta Business Community
• Six Easy Steps For Employers

Promoting the EITC is an opportunity for you to supplement the wages of your qualifying workers by encouraging them to take advantage of a government program that is specifically targeted to help low to moderate income working families. Also, promoting this benefit to employees can be of great benefit to the community.

By promoting the EITC you are encouraging individuals to claim their benefits. The Advance EITC also makes sure that families can use part of their benefit to cover current expenses rather than collecting the entire amount once a year. In addition, EITC benefits provide a stimulus to the local economy, as research shows that the monies received are for the most part, spent locally, thus helping the community overall.

EITC payments do NOT cost the employer money! In fact, this program provides an immediate increase in pay for the employee without impact to the employer's payroll costs. For the Advance EITC payments, employers simply subtract the advance payments they have added to their worker's paychecks from the total taxes withheld from all employees they would otherwise deposit with the IRS. Most automated payroll systems handle EITC calculations.

Wage-bracket and percentage method tables are provided annually by the IRS in Circular E for employers to determine the amounts of advance EITC payments they must provide to employees who have provided a completed Form W-5. These tables are based on all compensation paid to an employee that are subject to federal income tax withholding. If the employee has claimed an exemption from withholding on his or her Form W-4, earned income is the wages that would have been subject to withholding without the exemption. For more details, go to items #10 and #16 in www.irs.gov/publications/p15/ar02.html#d0e1912.

It's not difficult at all. The IRS provides convenient tables for calculating payments based on information the employee provides on Form W-5 and based on the employee's earnings. Most employers and payroll support services are already familiar with the Advance EITC because they are required by federal law to provide advance payments to any employee who files a W-5. Also, the payment procedure has built-in protections against overpayment.

There are minimal administrative costs associated with identifying potentially eligible employees, notifying employees, and processing W-5s. However, these costs are likely to be small in comparison to the positive effect on eligible employees' cash flow and asset-building potential resulting from participation in the Advance EITC program.

Not necessarily. While an employer could choose to provide assistance to employees, the employer can also refer them to the IRS for help by phone (1- 800-829-1040) or to a local site operated by the Volunteer Income Tax Assistance Program (VITA). This assistance is free of charge to qualifying individuals.

Generally, the failure to make an Advance EITC payment is treated as a failure to withhold. If an employer fails to make a required advance EITC payment, it will be liable for a penalty equal to the amount of the payment not made. It does not matter whether the employee is eventually found to be ineligible for the EITC when he or she files a personal income tax return, so long as a Form W-5 was in effect requiring advance payments.

While it is always best for an employer to consult with legal counsel on this question, providing information on a large-scale government program that may be available to some employees is unlikely to be viewed as "tax advice." Employees are still responsible for making the decision to participate in the Advance EITC by submitting Form W-5 to the employer.