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Earned Income Tax Credit and Your Business

There’s a perception that the earned income tax credit (EITC) is a giveaway and it is only for the working poor. January 27, 2017, is EITC Awareness Day, so it’s a good time to understand this tax credit and how it fits into your business.

© Gstudioimagen | Dreamstime.com - Taxes Payday Graphic PhotoWhat is the EITC?

This is a refundable tax credit paid to working individuals who have income below set amounts. Last year more than 27.5 million workers got the benefit of the EITC totaling $66.7 billion; the average credit amount was $2,400.

The credit can be claimed by someone with no qualifying child, but the amount of the credit grows larger for a worker with 1, 2, or 3 or more children. More specifically, for 2016 returns, the credit amount is up to $506 for a worker with no children, but up to $6,269 for those with 3 or more children.

The credit is fully refundable, which means it can be received even if there is no tax liability. However, it can only be paid if a taxpayer files an income tax return.

Help your employees

Prior to 2011, employers were required to notify employees about the EITC and give them the opportunity to factor it into their withholding so that they received the credit on an advanced basis; there were special withholding tables that factored this in. The advance earned income credit was repealed on August 10, 2010; the basic EITC was not repealed.

You can still be helpful to your employees by advising them of the EITC (without giving them any tax advice).

  • If they think they may be eligible for it in 2017, they can factor it into their withholding by filing a new Form W-4 with you.
  • If they think they may be eligible for it on their 2016 return, they must file for it, even if their income is below the filing threshold that applies for their filing status. Share with them the fact that the IRS has been blocked by law from issuing refunds for 2016 resulting from the EITC before February 15, 2017. And even if there’s no processing issue with a return, the IRS says not to expect the refunds showing up in taxpayer accounts until the week of February 27.

Take the credit for yourself

Was 2016 a bad year for your business? If you are self-employed, you may be eligible for the credit based on your net earnings from self-employment. Many small business owners who may be eligible for the EITC fail to claim it because of the perception that it applies only to employees, and then only to minimum wage workers. If you may be eligible for the credit, explore the details for claiming it. This refundable credit may provide you with a cash infusion that you can use in your business.

Looking ahead

With tax reform now on the table, what’s to become of the EITC? Will it be expanded? Will it be limited or repealed? It’s unclear at this time. However, there has been billions of dollars in fraud connected with improper EITC payments ($15.6 billion in improper payments in the government’s 2015 fiscal year), there’s likely to be some changes. The House Blueprint for tax reform would continue the EITC but plans to find ways to reduce fraud. Let’s see what happens

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