Tax Researcher
February 2009
ADVANCE EARNED INCOME CREDIT (EIC) PAYMENT
An employee who expects to be eligible for the earned income credit (EIC) and expects to have a qualifying child is entitled to receive EIC payments with their pay during the year. To get these payments, the employee must provide the employer a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. Employers are required to make advance EIC payments to employees who give them a completed and signed Form W-5.
Certain employees who do not have a qualifying child may be eligible to claim the EIC on their tax return. However, they cannot get advance EIC payments.
For 2009, the maximum amount of advance payments an employee can receive is a total of $1,826.
Form W-5
Form W-5 states the eligibility requirements for receiving advance EIC payments. On Form W-5, an employee states that they expect to be eligible to claim the EIC and shows whether they have another W-5 in effect with any other current employer. They also show the following:
- Whether they expect to have a qualifying child (son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild, niece or nephew)). An adopted child is always treated as a child.
- Whether they will file a joint return.
- If the employee is married, whether their spouse has a Form W-5 in effect with any employer.
Form W-5 is effective for the first payroll period ending on or after the date the employee gives you the form (or the first wage payment made without regard to a payroll period). It remains in effect until the end of the calendar year unless the employee revokes it or files another one. Eligible employees must file a new Form W-5 each year.
Paying the Advance EIC to Employees
An advance EIC payment is not wages and is not subject to withholding of income, social security, or Medicare taxes. An advance EIC payment does not change the amount of income, social security, or Medicare taxes that you withhold from the employee's wages. You add the EIC to the employee's net pay for the pay period. At the end of the year, the total advance EIC payments are reported in box 9 of Form W-2, but are not included in box 1.
If during 2009 you have paid an employee total wages of at least $35,464 ($38,584 if they are married filing jointly), you must stop making advance EIC payments to that employee for the rest of the year.
Employer's Returns
The employer's total advance EIC payments are shown on line 9 of Form 941, Employer's Quarterly Tax Return. This amount is subtracted from the total taxes reported on line 8. (Filers of Form 944, Employer's Annual Tax Return, would show the total advance EIC payments on line 8 and subtract it from the total taxes reported on line 7.)
Generally, employers will make the advance EIC payment from withheld income tax and employee and employer social security and Medicare taxes. For any payroll period, if the total advance EIC payments are more than the total payroll taxes, you may choose to either 1) reduce each employee's advance EIC proportionally so that the total advance EIC payments equal the amount of taxes due; or 2) elect to make full payment of the advance EIC and treat the excess as an advance payment of employment taxes.
STATE DISABILITY INSURANCE UPDATE
Laws in five states and Puerto Rico provide benefits for workers temporarily disabled by injuries or illnesses NOT related to their employment. Temporary disability benefits provide some salary continuation for persons who are unable to work because of illness or injury, but who do not qualify for benefits under workers' compensation or unemployment compensation laws. Workers' compensation laws cover only work-related injuries or illnesses, while unemployment laws require that claimants be able and available to work.
Temporary disability benefits may be financed in three ways: 1.) employee contributions withheld by employers, 2.) employer contributions, or 3.) by a combination of the two. Noted below are the EMPLOYEE contribution requirements for the six jurisdictions which have temporary disability benefit laws:
California: For 2009, the employee contributes 1.1% on the first $90,669 of annual earnings for a maximum deduction of $997.36. Employers may substitute comparable private plan coverage.
Hawaii: Half the cost of providing benefits is contributed by the employee. For 2009, however, no more than 0.5% of an employee's wages up to $877.69 weekly may be deducted (maximum weekly contribution of $4.39).
New Jersey: For 2009, employees contribute 0.5% of their first $28,900 of annual earnings for a maximum contribution of $144.50. Employers are not required to participate in the state plan if they provide comparable private plan coverage.
New York: Unchanged from 2008, the employee may contribute 0.5% of year 2009 wages, up to $0.60 per week. While the employer MUST provide disability insurance, it is the employer's decision whether to be reimbursed through employee deductions.
Puerto Rico: Again in year 2009, the employee will contribute 0.3% on the first $9,000 in wages. The maximum deduction is $27.00.
Rhode Island: For year 2009, the employee contributes 1.5%
on taxable wages up to $56,000. The maximum deduction is $840.00.
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TAX RESEARCHER is distributed with the understanding that the publisher is not rendering legal, accounting or other professional services. If such advice or assistance is required, an attorney or accountant should be consulted. This newsletter is published monthly by Statutory Research, a department of the Employer Services Division. Comments should be addressed to ADP, Inc., Statutory Research Department, One ADP Boulevard (M/S 364), Roseland, New Jersey 07068. Copyright 2009 ADP, Inc.