1099 earned income credit
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NOTICES REQUIRED BY SEVERAL STATES TO BE ISSUED TO EMPLOYEES REGARDING POTENTIAL ELIGIBILITY FOR EARNED INCOME TAX CREDIT
-by Bill Schmalle
In the past few years, several states have instituted laws requiring employers notify employees of their potential eligibility for getting reimbursements through the Federal Program Earned Income Tax Credit (EITC).
These notices, in most cases, are required to be distributed to employees around the time annual W-2 forms are distributed in January. These notices are in addition to the standard notice on the employee copy of the W-2 form that notifies employees of EITC; the state required form must be a separate form to employees from the W-2 form.
Even though the ADVANCED Earned Income Credit was eliminated in 2010, that elimination does not change the notice requirements in these states.
The states that require an employee EITC notice distribution in some form are California, Illinois, Louisiana, New Jersey and Texas.
The California law requires the notice be a hard copy sent to any worker who is receiving a W-2 form or 1099 at any income level. The information on the notice must read:
Based on your annual earnings, you may be eligible to receive the earned income tax credit from the federal government. The earned income tax credit is a refundable federal income tax credit for low-income working individuals and families. The earned income tax credit has no effect on certain welfare benefits. In most cases, earned income tax credit payments will not be used to determine eligibility for Medicaid, supplemental security income, food stamps, low-income housing or most temporary assistance for needy families� payments. Even if you do not owe federal taxes, you must file a tax return to receive the earned income tax credit. Be sure to fill out the earned income tax credit form in the federal income tax return booklet. For information regarding your eligibility to receive the earned income tax credit, including information on how to obtain the IRS Notice 797or any other necessary forms and instructions, contact the Internal Revenue Service at 1-800-829-3676 or through its Web site at www.irs.gov.
The notice must be sent within a week of the 1099 or W-2 being distributed and can be sent concurrently. A link of the California Employment Development Department website gives more information: http://www.edd.ca.gov/Payroll_Taxes/FAQ_-_Earned_Income_Tax_Credit_Notification.htm
Illinois has the same rules as California (separate distribution to all workers), but employers must ALSO provide the IRS Notice 797 to the employee. Illinois� notice must be a hard copy and must read as:
AT LEAST ONE CHILD, YOU MAY BE ELIGIBLE TO RECEIVE A TAX CREDIT FROM THE FEDERAL GOVERNMENT. THE TAX CREDIT MAY BE A REFUND FROM THE FEDERAL GOVERNMENT FOR AS MUCH AS $. EVEN IF YOU DO NOT OWE FEDERAL TAXES, YOU MUST FILE A TAX RETURN TO RECEIVE THE EARNED INCOME TAX CREDIT. BE SURE TO FILL OUT THE EARNED INCOME TAX CREDIT FORM IN THE TAX RETURN BOOKLET.
Louisiana�s law only requires notices to new employees who are realistically eligible for EITC, not the entire worker population and the notice requirement only applies to employers with 20 or more employees. Only new employees whose anticipated wages are $43,000 or less per year must receive a written notice from the IRS (Notice 797) or from the Louisiana Workforce Commission upon hiring the employee. The same notice(s) must be posted along with other required state and federal notices required by law in the employer�s place of business. The employee notice must be a hard copy notice.
Maryland�s law requiring a notice goes into effect for 2012 and the notice must be sent around the time 2011 W-2 forms are sent to employees. The notice can be electronic or hard copy and must be sent only to employees who would realistically eligible to claim Federal EITC and inform the employees they may be eligible to claim the Federal EITC.
New Jersey announced employers must continue to provide notice of EITC eligibility to employees for both Federal and State EITC when the Form W-2 is provided, between January 1 and February 15 of each year. The written notice must use the statement developed by New Jersey, at this link: http://www.state.nj.us/treasury/taxation/eitcnotice.shtml. This must be a hard copy notice.
Employers must provide general information to employees on the federal earned income tax credit by March 1 of each year. The information may be provided: (1) in person, (2) electronically at the employee's last known e-mail address, (3) by written or electronic flyer such as a payroll stuffer, or (4) by mail. Information posted in the place of employment does not satisfy this requirement. Text to actual law: http://www.statutes.legis.state.tx.us/Docs/LA/htm/LA.104.htm#104.002
More information is available at the Texas Comptroller website: http://www.window.state.tx.us/taxinfo/eitc/
Bill Schmalle has been in Payroll for over 25 years in a variety of industries, including Legal, Real Estate Investment, Public School District, Big 5 Accounting, Professional Employment Organization (PEO), and his current position in Health Care as Financial Business Analyst at McKesson.
He serves the APA on both a local and national level. On the local level, he has been the Government Liaison Officer of the San Francisco APA Chapter since 2000, and writes a monthly column on Legislative Updates, as well as sending out periodic emails to chapter members when Legislative announcements occur.
Nationally, Bill has been on the APA National Speakers Bureau since 2007 and is an instructor for APA�s 3-day Payroll Practice and Essentials (PPE) class at various locations around the country. Bill also is a member of the 2 National APA Government Affairs Task Force; IRS Forms and Social Security.
Information about the federal and California earned income tax credit
In accordance with AB 1847, passed by the California legislature last September, employers are required to notify all employees that they may be eligible for the federal and California earned income tax credit (EITC) within one week before or after, or at the same time, that the employer provides an annual wage summary, including, but not limited to, a Form W-2 or a Form 1099, to any employee.
The federal EITC is a refundable federal income tax credit for low-income working individuals and families. The California EITC is a refundable state income tax credit for low-income working individuals and families.
If you believe that, based on your annual earnings, you may be eligible to receive the earned income tax credit from the federal or state government, see this notice posted on UC Net.
Earned Income Credit – What Is It and How Does It Work?
NOTE: Effective January 1, 2011 the option for advanced EIC payments has been eliminated. Employers are not longer able to advance a portion of the credit with each paycheck.
Earned Income Credit (EIC) can be referred to several ways, such as Earned Income Tax Credit (EITC) or Advanced Earned Income Credit (AEIC).
EIC is a tax credit for certain individuals who don’t earn a high income and qualify for EIC. They would receive the tax credit when they file their personal tax return.
An individual must have earned income from employment, self-employment, AND meet special rules. To help determine if your employee qualifies, you can use the EITC Assistant on the IRS website. The employee also needs to give you a completed and signed W-5 form (Earned Income Credit Advance Payment Certificate). The form expires each year on December 31 st . The employee must give you a new form each year. This form shows four criteria that must all be met for an employee to be eligible. Below is an excerpt from the 2010 IRS W-5 form:
You are eligible to get advance EIC payments if all four of the following apply.
- You (and your spouse, if filing a joint return) have a valid social security number issued by the Social Security Administration.
- You expect to have at least one qualifying child and to be able to claim the credit using that child. If you do not expect to have a qualifying child, you may still be eligible for the EIC, but you cannot receive advance EIC payments.
- You expect that your 2010 earned income and adjusted gross income (AGI) will each be less than $35,535 ($40,545 if you expect to file a joint return for 2010). Include your spouse’s income if you plan to file a joint return…
- You expect to be able to claim the EIC for 2010.
How is the EIC given to the employee?
Normally your payroll system will handle the calculation of the tax credit amount, assuming you correctly indicate that the employee is eligible for EIC. Depending on how the employee completes their W-5 Form, you would indicate whether the employee’s filing status is Single, Married with One Certificate, or Married with Two Certificates (meaning each spouse is eligible to get the EIC).
It’s important to note that the W-5 Form expires each December 31 st . Therefore, you will need to update the EIC information in your payroll system before the first pay in January to ensure accuracy, especially if the employee no longer qualifies.
Also worth noting is that it is possible that the employee could still have federal tax withheld even though they’re getting a tax credit, depending on how they complete their W-4 form.
How will the EIC appear in a payroll?
Depending on your payroll system, the EIC will appear as a separate line item in the employee’s earnings. It will not be included with gross pay, as it is not taxable.