The Earned Income Tax Credit (EITC) entitles moderate to low-income individuals to a tax credit. This credit can either be withheld by being factored into the total amount of income taxes an employer subtracts from the employee's paycheck, thereby reducing the amount of withholding, or claimed by the entitled employee on their tax return.
Notice of Withholding Earned Income Credits
A notice of withholding earned income credits is a document provided by an employer to an employee. The employer states that the employer believes the employee is entitled to the credit and will be withholding its amount from their paychecks. In actuality, because it is a credit against tax, it is not withheld, but instead included into the employer's calculations of the proper amount of income tax withholding for the employee. Because the credit reduces tax liability, it reduces the total amount of income tax the employee must pay, thereby lowering the amount withheld from their paycheck.
The notice will be issued to any employee for whom an employer factors the credit into withholding. It will be issued prior to or simultaneously with the first paycheck in which it is included. There is no specific wording for the notice. In general, it tells the employee that because of the employer's including the credit in their withholding they will have effectively already claimed the credit over the year, and cannot do so again on their return.
Notice of Withholding vs. Notice of EITC
Beginning in 2008, the federal government required all employers to provide notice to employees about the availability of the Earned Income Tax Credit (EITC). The document required to be provided is Notice 797, titled "Possible Federal Tax Refund Due to the Earned Income Credit (EIC)". It provides a general overview of the EITC and encourages employees to investigate their eligibility. It also defines a dependent child and discusses how to claim the credit.
This notice differs from a withholding notice. The notice of the EITC tells the employee about the credit, and does not inform them that their employee is including it in their withholding.
The Earned Income Tax Credit Explained
The EITC is a credit available to moderate to low-income individuals. It is claimable on their tax return and reduces the total amount of their tax liability. It is refundable if it reduces liability beneath zero. The credit is available to all employees, including those that are self-employed, who support a dependent or otherwise meet eligibility guidelines, including maximum income.
The amount of credit depends on the employee's income and the number of children they support, if any. Claimants without a dependent child must be between the ages of 25 and 65, not claimed as a dependent on any other tax return and live in the United States for the majority of the year. The credit amount also depends on the employee's filing status: single or married filing jointly.
If they support a child, the child must meet the Internal Revenue Service (IRS) rules for a "dependent child": the child is younger than 19, or no older than 25 if they are a full-time student, related to the employee by blood or adoption and reside the majority of the year in the United States.
Each year new EITC income limits and credit amounts are set by the IRS.
Notice of Withholding
If you receive a notice of withholding for the EITC, you technically have to do nothing in response. Your credit will be spread evenly over your paychecks. Even though you will not be able to claim it on your return, you still receive the benefit of the credit.
You can choose not to claim the credit. In this circumstance, you would need to inform your employer that you do not wish that the credit be included in your withholding. Your employer is required to follow your requests about your taxes, and as such will change your withholding accordingly. You may have to sign a document establishing that you do not want to claim the credit.
If you waive the credit in your withholding, you may still claim any remaining amount on your tax return. Doing so reduces your overall tax liability.