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Advanced EIC and Tax Codes

Federal Earned Income Credit (EIC) reduces the amount of federal income tax owed by certain employees. This documentation uses the term EIC and EITC interchangeably. Eligible employees may elect to receive Advance EIC payments and may claim Earned Income Credit when filing their federal income tax returns. An eligible employee must complete IRS Form W-5 each year if he/she would like to receive Advance EIC payments.

IRS Form W-5 outlines eligibility requirements for EIC and Advance EIC, including income restrictions. Earned income is based on taxable earned income and adjusted gross income.   

The IRS sets a limit on annual payments called Advance EITC (Advance Earned Income Tax Credit) that may be paid directly to a qualified employee through payroll processing. In addition to paying the employee Advance EIC payments through payroll processing, a company must also reduce the 941 federal income tax (FIT) liability amounts to compensate for the tax monies paid through Advance EIC payments. The software uses Table 8, Daily or Miscellaneous Payroll Period.

Advance EIC Setup

The method to set up Advance EIC is straightforward:

A negative employee tax record is used to credit the employee and reduce 941 FIT liabilities at the same time. Based on the eligible employee’s completed Form W-5 for the current tax year, an EIC Tax Code is assigned on the Employee Tax Detail record.

The local tax distinction on the EIC is for system reporting purposes. There are processes that affect FIT that process based on the FIT tax authority indicator that EIC should not be included in, which is why EIC tax codes are attached to the local tax authority indicator.

The process of verifying setup for Advance EIC is summarized in the following three steps:

1. Verify that the EIC Payroll Accumulators are Active: SP_EIC_S1, SP_EIC_M1, and SP_EIC_M2.
2. Verify Tax Codes for EIC: EIC_SM1, EIC_M1, and EIC_M2. Verify the wage limits are the current year's amount. Add additional Tax Codes for EIC as needed for multi-company systems.
3. Add/verify/edit Advance EIC tax detail records. For information about how to manage employee EIC records, refer to Form W-5 and Advance EIC Records.

Employee Status from W-5, Standard EIC Tax Codes, and Accumulators