1997 Tax Help Archives  

Form W-5 - Advance Earned Income Credit

This is archived information that pertains only to the 1997 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Would you like to help your employees increase their take-home pay at no cost to you? You can do this by giving eligible employees part of the earned income credit with their pay and subtracting the payments you make from withheld payroll taxes. This is possible through the Advance Earned Income Credit (AEIC) program.

The earned income credit is a refundable credit for certain workers that qualify for it, and is intended to help offset some of the increases in living expenses and Social Security taxes. This credit reduces the amount of tax owed, if any, and may result in a refund to the taxpayer.

For 1998, eligible employees can receive part of their earned income credit as part of their paychecks throughout the year, instead of waiting until they file their 1998 tax returns. To be eligible for this AEIC payment, an employee must have a qualifying child, expect to fall within certain income limits, and meet other specific requirements, which are explained on Form W-5.

Here's how it works: An eligible employee who wants the credit with his or her pay must give you a completed and signed 1998 Form W-5. You are required by law to make advance payments to eligible employees who give you Form W-5. The W-5 Form is only valid for one calendar year. If your employee expects to be eligible the following year, he or she must give you a new form.

To figure the credit amount you include with the employee's pay, use either the Tables for Percentage Method or Tables for Wage Bracket Method of Advance EIC Payments in Publication 15, Circular E, Employer's Tax Guide.

The advance payment is added to the employee's net pay for the pay period. Since the EIC isn't wages, you don't withhold any income, social security, or Medicare taxes from the payment. Generally, you make the advance payments from withheld income tax and employee and employer social security and Medicare taxes. However, the payment doesn't change the amount of employment taxes you would usually withhold from the employee's pay. If the employee is entitled to an advance payment that is more than his or her withholding, you can still make a payment to the employee.

Simply show the total payments you made to your employees on the advance EIC line of your employment tax return, Form 941, or 943, whichever applies, and subtract this amount from your total taxes. Publication 15 and the specific instructions for the form you file will give you more information.

You can order copies of Form W-5 by calling 1-800-829-3676. Also, the IRS offers Outreach seminars to explain AEIC and EIC to interested groups. If you are interested in having an IRS employee speak to your payroll personnel and employees on AEIC and EIC, call 1-800-829-1040 and ask for the Taxpayer Education Coordinator for your area.

Tax Topics & FAQs | Tax Help Archives | Home