The Earned Income Tax Credit (EIC) is a refundable tax credit for low-income workers and families. The credit, originally enacted in 1975, was designed to both reduce the burden of payroll taxes and supplement wages of those who were eligible.
The credit is claimed on one’s individual income tax return. In the past, employers were able to advance a portion of the credit to their eligible employees. For tax-year 2011 and beyond, this will no longer be an option. Due to a provision of HR 1586 (Public Law 111-226, Section 219), signed into law by President Obama on August 10, 2010, employers may no longer advance payment of the earned income tax credit to employees.
As a result, those eligible for the earned income tax credit will receive larger refunds when they file their individual income tax returns. On the flip side, although they are receiving more money at the end of the year, they are taking home less money each pay. The difference is in timing only. If the credit were paid in installments with each paycheck, or in one lump sum, the amount of the credit would be the same.
Why is this important? Employers must be aware of the change so that they can accurately process payroll. They must also communicate the change with their employees who are currently receiving advance payment of the earned income tax credit, so that the employee can plan for 2011 and beyond when the advance is no longer available.
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