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Texas Payroll/Personnel Resource

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Tax Information
Earned Income Tax Credit

The Earned Income Tax Credit (EITC), also called the Earned Income Credit (EIC), is a federal income tax credit for certain low-income workers. The credit, called the “earned income” credit because a person must work and have earned income to qualify, may reduce the amount of tax an employee owes and may be returned in the form of a refund. Even if employees do not have to pay taxes on income, they may still qualify for a refund; however, they must file a tax return to claim the credit. Earned income includes all taxable income from employers.

Employees may be eligible to take the credit if they earn less than the amount specified each year by the Internal Revenue Service (IRS); however, other limits are also used to determine eligibility, such as the amount of an employee’s adjusted gross income and investment income. For additional information, see the IRS website.

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Advance EITC – No Longer Authorized Through Payroll

Note: Legislation signed into law Aug. 10, 2010, repeals the Advanced Earned Income Tax Credit (Advance EITC). Recipients will not be able to claim Advance EITC after Dec. 31, 2010. This has been interpreted to mean that although qualified individuals will still be able to claim an Earned Income Tax Credit by filing a form 1040 for Tax Year 2011, they will not be able to claim and receive an adjustment or advanced refund during the tax year.

Rather than waiting to get the refund when they file taxes, eligible employees are entitled to receive advance EITC payments with their compensation during the year. IRS guidelines state that to be eligible for advance EITC payments, employees must meet the EITC income requirements and have at least one qualifying child. The advance payment is added to the employee’s net pay but is not considered wages. Therefore, Federal Income Tax, Social Security and Medicare taxes are not withheld from the advance EITC portion of the payment.

To receive advance EITC payments, the employee must provide a completed Form W-5, Earned Income Credit Advance Payment Certificate. An employer must make advance EITC payments to an employee who provides the form. The form can be filled out at any time during the year and is effective until the end of the calendar year unless the employee revokes it or files a revised form. A new form must be filed each calendar year.

Each calendar year, a new maximum for advance EITC payments is published in IRS Circular E, Employer’s Tax Guide.

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Notification of Earned Income Credit

IRS Publication 15 (Circular E), Employer’s Tax GuidePDF explains that employers are required to notify employees who have no federal income tax withheld that they may be eligible to claim a tax refund because of EITC. Other employees may also be notified, such as those whose wages fall below the IRS guidelines for EITC published in Circular E.

One way to meet this notification requirement is to post the information on the back of the W-2 form. If you use the IRS Form W-2, the EITC statement is already on the back of Copy B. A substitute W-2 form may meet the requirement if the same statement is used.

Another alternative is to provide IRS Notice 797PDF, or your own statement that has the same wording. In general, employees must receive the notice by the time that W-2s are issued. For specific information, refer to the IRS.

The Texas Legislature has designated the Comptroller’s office as the lead agency to promote awareness of the federal earned income tax credits for working families and individuals who qualify. Brochures, posters and other educational resources are periodically made available and listed on the EITC page on Comptroller.Texas.Gov.

State law requires state agencies to cooperate with the Comptroller’s office in efforts to distribute information about EITC. State law also allows agencies to use their existing resources to distribute information to people who are likely to qualify for EITC.

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IRS Publication 15 (Circular E), Employer’s Tax Guide See generally Texas Government Code Annotated, Sections 403.0111, 403.025 (Vernon 2004).