One of your responsibilities as an employer is to notify employees of specific tax situations that can affect them. One of these situations is a notification about the earned income tax credit.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit for eligible lower-income workers. It 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 EITC amount if it is more than the tax they owe. That's where you come in as the employer.
Your Responsibility to Notify Employees
As an employer, you have a responsibility to notify employees about this tax credit. Specifically, the IRS requires you to notify employees who don't have federal income tax withheld.
You are encouraged to notify each employee whose wages for the year are less than a specific amount, depending on the employee's filing status, that he or she may be eligible for the EITC. This number changes each year. For tax year 2020, wages less than $56,844 may have been eligible.
See IRS Publication 1015 for the current year with the current amount.
Your responsibility as an employer stops with giving notification to employees. If the employee wants to make a change in withholding, you can give them a W-4 form. You don't have to help them with the EITC application process.
How and When to Notify Employees
You must notify every employee who:
- Worked for you during the year, and
- Didn't have federal income tax withheld from their pay.
But you don't have to notify any employee who claimed exemption from withholding. You can find the information about claiming an exemption on the employee's W-4 form that they signed when they were hired.
Under the 2021 American Rescue Plan Act, more taxpayers are eligible for the Earned Income Tax Credit credits in 2021, even if they didn't qualify in previous years, including those with a higher income, as well as:
- More childless households
- Taxpayers ages 19-25 (except full-time students)
- Taxpayers over age 65
How Do I Notify Employees?
You can give the notice to employees in several ways:
- Handing them the notice personally
- Mailing the notice to their address
- Including the notice with their W-2 form
The easiest way to meet the notification requirement is to include a notice about the EITC 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 (the copy that the employee files with their 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.
You must give each employee a copy of the notice in one of the ways listed above. You can't just post it on the employee bulletin board, although you can do so in addition to making sure each eligible employee has a copy.
When Must I Give Employees the Notice?
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, January 31 of the year after the tax year.
What Must I Tell the Employees?
Give employees IRS Notice 797 (or a copy with this exact wording), which explains:
- What the Earned Income Tax Credit is
- How to qualify this tax credit
- Who is a qualified child
- How to claim the tax credit