Understanding the Earned Income Tax Credit

What is the Earned Income Tax Credit (EITC)?

The EITC, also known as EIC, is a tax credit provided to lower income workers to help offset the basic living expenses. The EITC credit is worth up to $6,935 for 2022, and will be up to $7,430 for 2023. If an employee qualifies for the EITC, they might also qualify for other tax credits such as the Child Tax Credit.

Who is eligible for the EITC?

• must have lived in the US for at least 6 months
• cannot be the qualifying dependent child of another person
• must have worked and earned income even if such income is not taxable
• must have a filing status other than married filing separately
• must not be able to exclude any income that is earned in foreign countries
• and must file a return that covers a 12 month period, and

If has no children:

• must be over age 25 but below age 65

If has children:

• must have the child living with him in the US for more than 6 months out of the year (12 months for foster children)
• must claim the child as a dependent
• qualifying child cannot be the qualifying child of another person whose adjusted gross income is more than theirs

Maximum adjusted gross income (AGI):

To qualify for EITC, the employee's adjusted gross income must be less than a certain amount depending on the filing status and number of qualifying children. Below are the EITC thresholds:

2022

Single, Head of Household, or Widowed

• No children: earned less than $16,480
• 1 child: earned less than $43,492
• 2 children: earned less than $49,399
• 3+ children: earned less than $53,057

Married filing jointly (combined AGI)

• No children: earned less than $22,610
• 1 child: earned less than $49,622
• 2 children: earned less than $55,529
• 3+ children: earned less than $59,187

2023

Single, Head of Household, or Widowed

• No children: earned less than $17,640
• 1 child: earned less than $46,560
• 2 children: earned less than $52,918
• 3+ children: earned less than $56,838

Married filing jointly (combined AGI)

• No children: earned less than $24,210
• 1 child: earned less than $53,120
• 2 children: earned less than $59,478
• 3+ children: earned less than $63,698

Earned Income Tax Credit amounts:

If the employee qualifies for EITC, below are the amounts the credit could be worth up to:

2022

• No children: $560
• 1 child: $3,733
• 2 children: $6,164
• 3+ children: $6,935

2023

• No children: $600
• 1 child: $3,995
• 2 children: $6,604
• 3+ children: $7,430

Who is a qualifying child?

A qualifying child:

• is the employee's child, adopted child, stepchild, foster child, or a descendant of his child or adopted child
• is under age 19 or is a full time student under age 24 or is permanently and totally disabled
• lived with the employee in the US for more than 6 months out of the year (12 months for foster children) or was born, or died, during the year and the employee's home in the US was the child's home for its entire life.

How does an eligible employee claim the EITC?

The EITC may be claimed as a direct offset to an employee's income tax liability on his Form 1040. The EITC may lead to a refund even if no income tax was withheld or owed.

An employee with at least one qualifying child may also be eligible for advance payments of the EITC.

Do I, as an employer, have any responsibilities related to the EITC?

You should notify employees whose wages are not subject to federal income tax withholding (unless they are exempt because they did not incur any liability for the previous year and expect to incur no liability for the current year) that they may be eligible for a refund as a result of the EITC. You might also want to notify employees making less than the qualifying amounts that they might be eligible.

Notification may be made by providing to the employee:

• Form W-2: Wage and Tax Statement
• Notice 797: Possible Federal Tax Refund Due to the Earned Income Credit
• or, a written statement equivalent to Notice 797.

How do I make advance payments of the EITC to an employee?

1. Obtain Form W-5, Earned Income Credit Advance Payment Certificate, from the employee. To elect the credit, the employee must give you a signed Form W-5 indicating that he expects to be eligible for the credit, whether he is married, and whether his spouse has a Form W-5 in effect with an employer. Form W-5 must be renewed annually by January 1. You must discontinue advance payments if a new Form W-5 is not submitted for the year. Employees not currently receiving advance payments may file Form W-5 at any time during the year.
2. Determine the employee's wages. Wages are generally payments subject to FIT withholding or FICA taxes (including tips). Employees not subject to FIT or FICA withholding are not entitled to advance payments.
3. Determine the amount of the advance payment. Once you know an employee's wages, the relevant pay period, and whether a married employee's spouse has a Form W-5 in effect, you may use tables provided by the IRS for determining the amount of the advance payment.
4. Add the advance payment to the employee's paycheck. The amount of the advance payment is added to the employee's net pay; the advance payment is not compensation for services and does not change the amount of income or FICA taxes that are withheld for the employee.

What do advance payments cost me?

Advance payments are deducted from your deposit of FIT and FICA withholdings and taxes and so involve no out of pocket cost to you.