Wisconsin Works (W-2)
Earned Income Credit: A Competitive Edge for Employers
The Earned Income Credit (EIC) is a tax credit available to qualified low-income workers. EIC helps low-income workers increase income. It reduces the income tax a family owes, and at times, it will provide a refund greater than taxes owed.
There are federal and state programs. Eligibility standards are the same for both EIC programs, although Wisconsin requires at least one qualified child in the household and year round Wisconsin residency.
More Pay Equals Less Turnover
Any employer knows that the more pay employees make, the less likely it is they will seek work elsewhere. EIC can increase an eligible worker's pay at no expense to the employer. EIC is a tool that employers can use to help retain workers, reduce turnover, and decrease associated training and hiring costs.
How Federal EIC Works
The actual payment an applicant can receive is subject to a sliding scale based on annual earnings and the number of qualifying children living in the household. Eligible workers with no children can receive a federal tax credit of as much as $412 for tax year 2006. Taxpayers with qualifying children could be eligible for a maximum federal EIC benefit for tax year 2006 of up to:
- $2,747 if they have one qualifying child (maximum income of less than $32,001 or $34,001 if married), or
- $4,536 if they have two or more qualifying children (maximum income of less than $36,348 or $38,348 if married).
- This amount decreases until the annual income limit is reached.
Wisconsin EIC payments are based on a percentage of the federal payment: four percent for one child, 14 percent for two children, or 43 percent for three or more children. The maximum state credit is $1,950 (in addition to the federal EIC).
Advance Federal Earned Income Credit (EIC)
Federal EIC rules also allow workers with qualified children to collect up to 60 percent of EIC benefits distributed evenly over each pay period during the year. This is known as the Advance Earned Income Credit. This may be very important to some workers, since statistics have shown that 90 percent of EIC recipients use the credit to pay bills such as rent, child care, utilities, and food. Taxpayers can also receive the credit as an end-of-year, lump-sum payment.
IRS Form W-5: What It is and How It is Used for Advance EIC
Procedures for IRS Form W-5 are similar to federal tax withholding IRS Form W-4 in that workers must fill it out and give it to their employer. However, the worker, rather than the employer, is responsible for determining whether s/he is eligible for the advance earned income credit. Nearly all human resources pay and benefit computer programs can routinely handle EIC and Advance EIC. The employer includes the Advance EIC payments in the paychecks. The employer recoups the amounts of EIC advances by reducing the amount of payroll tax paid.
For additional information on Federal EIC or AEIC, please call 1-800-829-1040 or see the IRS website. For more on the Wisconsin EIC, see the Wisconsin Department of Revenue website.
DES-10995-P (R. 12/04)