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Reward Employees With Earned Income Tax Credit

February 1, 1999
Related Topics: Compensation Design and Communication, Finance/Taxes, Featured Article
Want to do something nice this year for your low-income workers—without spending money? The Internal Revenue Service has a program called Earned Income Tax Credit (EITC). Here’s how it works: You make advance payments to qualified employees from the taxes you’d normally withhold, and their salary, in some cases, increases by as much as $100 per month. You then claim the amount on your quarterly employment tax form, and you’re done. It’s that simple.

Most of you may already know about EITC. After all, it has been around since 1975, and revisions to the laws made in 1993 further increased overall awareness (not to mention participation rates). Still, it never hurts to revisit a program that increases the take-home pay of people who may be struggling just to make ends meet—especially when you consider more than 15 million workers may qualify for this particular tax credit program.

"Most employers are concerned about benefits and pay, and this is one way they can provide additional income to qualified employees," says Wayne Goshkarian, president of Phoenix, Arizona-based AGB, an employee benefits consulting firm.

When the EITC was first considered in 1975, policy makers agreed the most significant objective should be to assist in encouraging nonworkers to obtain employment and to increase qualified workers’ income. Last year’s qualifying requirements for EITC broke down this way: employees who earned less than $25,760 a year and had one child living with them, employees who earned less than $29,290 a year and had two or more children living with them, and employees with no children who earned less than $9,770 a year. In addition, the Federal Government will refund any earned income tax credit not claimed by the employee for the past three years to a maximum of $1,000 per year.

Let workers know about the tax credit program.
The EITC is the only benefit delivered to low-income individuals through the tax system. Unlike other cash-assistance programs for low-income families, applicants don’t have to wait in long lines or take time off from work to apply.

For those who still don’t know about it, though, HR simply can send out notices. Pat Lally, personnel manager for Des Plaines, Illinois-based Amerihost Staffing, a human resources and payroll company with 2,900 employees at 100 hotels in 15 states, says she thought the whole EITC process would become a "massive undertaking," but it didn’t. "These days, our people see this as a program that says we’re willing to go the extra mile for them."

The rest is up to your payroll department.
Many HR managers may not even know the IRS requires them to notify low-income employees that they might be eligible for the earned-income credit. "A lot of people make less than $29,290 per year," says Goshkarian. "Although most HR people have heard of the program, they don’t really understand how the credit works or even if their employees are eligible."

It takes about 15 minutes to explain the program to your employees and determine their eligibility. Then it’s just a matter of filling out IRS Form W-5, the Earned Income Credit Advance Payment Certificate, and turning it over to your payroll department (most payroll software programs accommodate the processing). You don’t even need to send it to the IRS. Just keep the form on file. The next paycheck your employee receives will see a substantial increase.

"Just because it doesn’t cost you anything doesn’t mean you aren’t providing a service to your employees," adds Goshkarian. "Your employees get the dollars and you’re seen as a hero for bringing it to everyone’s attention."

For more information on how much earned-income credit advance to add to an employee’s paycheck, read the IRS Publication 596, Employer’s Tax Guide.

Workforce, February 1999, Vol. 78, No. 2, p. 102.

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