Helping employees increase their take-home pay can be a significant piece of your employee retention program. As tax time draws near, consider educating your staff about the Earned Income Tax Credit (EITC) and the Advanced Earned Income Tax Credit (AEITC).
Developed in 1975 as a welfare-to-work incentive, EITC is a refundable tax credit that supplements the earnings of low-income workers. More than 18 million taxpayers received EITC in 1997, and an estimated 15 million employees are eligible for the AEITC.
To qualify for EITC, an employee must meet six criteria, including a threshold of $2,400 in investment income and earned income of $31,152. Earned income is defined as (but is not limited to) wages, salaries, tips and salary reductions as a result of participation in retirement or insurance plans.
As an employer, your participation is easy: Notify employees who have no income tax withheld that they may be able to claim a tax refund because of the EITC.
The IRS encourages employers to notify any employees who claim exemption from withholding or have wages less than $10,380 for a single employee, $27,413 for a custodial parent and $31,152 for the guardian of more than one dependent child, that they may be eligible to claim the credit for 2000.
Employees can receive part of the credit in their paycheck if they qualify for EITC for the year instead of waiting for the lump sum at the end of the year. The payments are called advance EITC payments and can increase a minimum wage employee take-home pay significantly.
"Only 1 percent of people that are eligible for the earned income credit actually activate it in their paychecks, and typically that is going to be (more than) a dollar an hour raise to your employee," explains Bethany Davin, director of a local welfare-to-work program.
For an employee earning minimum wage, the increase could translate into more than $100 a month.
To qualify, income must be less than $28,000 and recipients must be the guardian or parent of a qualifying child. A qualifying child means any child cared for, including an employee's own child, step-child, foster or adopted children, grandchildren and/or any child placed with the employee.
Have eligible employees fill out a W-5, which you keep on file. AEITC payments are made directly to the employees from the employment taxes normally deposited or sent to the IRS. For more information, contact the IRS at (800) 829-3676 or visit www.irs.gov.
Kim Palmer (firstname.lastname@example.org) is managing editor of SBN Magazine.