Earned Income Credit: What It Means for Employers

What it means in practice

What the credit is. Section 32 of the Internal Revenue Code allows an eligible individual a credit equal to a "credit percentage" of earned income up to an "earned income amount," reduced by a "phaseout percentage" of adjusted gross income (or earned income, if greater) above a phaseout amount. The statute sets the credit percentage at 34% with one qualifying child, 40% with two, 45% with three or more and 7.65% with none, and the phaseout percentage at 15.98%, 21.06%, 21.06% and 7.65%. The IRS describes the EITC as helping "low- to moderate-income workers and families get a tax break." It is a federal income tax credit for the employee, not an employer tax credit, and it is not figured in payroll. For how the tax it offsets is computed, see federal income tax.

Why "refundable" matters. Under 26 U.S.C. 6401(b), when refundable credits exceed the income tax imposed, the excess is treated as an overpayment, which is why an eligible worker can receive the credit as a refund even with no tax owed. Notice 797 gives the example of a worker who had no tax withheld, owes no tax and is eligible for an $800 credit: that worker must file a return to get the $800. The back of the 2026 Form W-2 Copy B says the same thing: any EITC that is more than the tax liability is refunded, "but only if you file a tax return."

Who can qualify. Publication 596 (2025) lists rules for everyone: AGI and earned income under the limits, a valid Social Security number by the return due date (including extensions), U.S. citizen or resident alien all year (with a joint-return exception), no Form 2555 foreign earned income exclusion, investment income under the limit, and earned income. A married person must usually file jointly, with a special rule for separated spouses. A worker without a qualifying child must be at least 25 but under 65, cannot be another person's dependent or qualifying child, and must have lived in the United States more than half the year. Publication 596 says a taxpayer with an ITIN instead of an SSN cannot get the EIC. These rules apply to the employee's own return.

What counts as earned income. The IRS earned income page lists wages, salaries and tips shown in Form W-2 box 1, household employee wages, self-employment and gig income, taxable union strike benefits, certain disability benefits received before minimum retirement age, and nontaxable combat pay if the worker elects to include it. It says to include the full amount of tip and overtime income when determining EITC eligibility even if part is deductible. It excludes pay for work done as an inmate in a penal institution, interest and dividends, pensions and annuities, Social Security benefits, unemployment benefits, alimony and child support. Box 1 wages are explained under W-2 form; the broader concept is covered under gross income.

2026 figures in detail. Rev. Proc. 2025-32 sets the 2026 earned income amount, the level at which the maximum credit is reached, at $8,680 with no qualifying children, $13,020 with one and $18,290 with two or three or more. The phaseout begins above $10,860 with no children and $23,890 with children for single, head of household and other non-joint filers, and above $18,140 and $31,160 for married couples filing jointly. The Rev. Proc. notes that the Form 1040 instructions provide the tables that set each taxpayer's actual credit. When this page was reviewed, the IRS had not published a 2027 inflation-adjustment revenue procedure, so 2027 EIC amounts are not shown here; check IRS.gov for the current figures.

Example 1 (illustration): how the 2026 numbers fit together. For a worker with one qualifying child, 34% of the $13,020 earned income amount is $4,426.80, which matches the published $4,427 maximum. For a single filer, the credit falls by 15.98% of AGI above $23,890; $4,427 divided by 0.1598 is about $27,703, and $23,890 plus $27,703 is $51,593, the published completed phaseout amount. With no qualifying child, 7.65% of $8,680 is $664.02 (published maximum $664), and $10,860 plus $664 divided by 0.0765 gives about $19,540. This shows how the statute produces the figures; the IRS tables, not this arithmetic, set an actual credit.

The employer notice requirement. Publication 15 (2026), section 10, says employers must notify employees who have no federal income tax withheld that they may be able to claim a refund because of the EIC. Employees in American Samoa, Guam, Puerto Rico, the CNMI and the USVI are excepted, and the Form W-2 instructions say the notice does not apply to Forms W-2AS, W-2CM, W-2GU and W-2VI. Publication 15 says an employer does not have to notify employees who claimed exemption from withholding on Form W-4, but encourages notifying any employee whose 2025 wages were less than $61,555 ($68,675 if married filing jointly). Notice 1015 (Rev. December 2025) applies the rule to each employee who worked for the employer at any time during the year.

Ways to satisfy it. Publication 15 and Notice 1015 list four options: the official IRS Form W-2, which carries the EIC notice on the back of Copy B; a substitute Form W-2 with the same statement; Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC); or the employer's own written statement with the same wording as Notice 797. If an on-time Form W-2 has the statement, no further notice is needed.

Timing rules. If a substitute Form W-2 is given on time but lacks the statement, the employer must notify the employee within one week of the date it is given. If a required Form W-2 is not given on time, Notice 797 or the written statement is due by the date Form W-2 was required. If no Form W-2 is required, Publication 15 (2026) gives a notice date of February 9, 2026 for the 2025 year. The 2026 Form W-2 instructions set February 1, 2027 as the general date for furnishing 2026 Forms W-2 to employees.

How to deliver it. Notice 1015 says the notice must be handed directly to the employee or sent by first-class mail to the employee's last known address. Posting Notice 797 on a bulletin board or sending it through office mail does not meet the requirement, although the IRS says employers may want to post it as well.

Step by step for an employer. (1) After the last payroll of the year, identify employees from whose wages no federal income tax was withheld, setting aside those who claimed exemption on Form W-4 and those in the listed territories. (2) Decide which method gives the notice: an official Form W-2 with Copy B, a substitute W-2 with the statement, or Notice 797. (3) Furnish Forms W-2 by the due date (February 1, 2027 for 2026 wages). (4) If a substitute W-2 lacks the statement, send Notice 797 within one week. (5) Deliver by hand or first-class mail, not a bulletin board. (6) Check state rules.

Example 2 (illustration): a substitute W-2. A part-time employee earns wages in 2026 too low for any federal income tax to be withheld under their Form W-4, and has not claimed exemption. The employer furnishes a substitute Form W-2 on February 1, 2027 without the EIC statement. Under Publication 15, the employer must give Notice 797 or an equivalent statement within one week, by February 8, 2027, by hand or first-class mail.

How it interacts with withholding. The employer withholds federal income tax from the employee's Form W-4 under the usual rules; see federal income tax withholding. Publication 505 (2026) Worksheet 1-6 lists the earned income credit among projected credits an employee may include in the Step 3 amount on Form W-4, which reduces withholding. The 2011 Publication 15 explained that, after advance payments ended, employees expecting the EIC who have income tax withheld "may reduce their withholding in order to receive the benefit of a portion of the credit throughout the year."

History: advance EIC and Form W-5. From 1978 until 2010, 26 U.S.C. 3507 provided for advance payment of the EIC through payroll. Publication 15 (2010) says an employee who expected to be eligible and to have a qualifying child could give the employer Form W-5, Earned Income Credit Advance Payment Certificate, and employers were required to make advance payments to employees who gave a completed and signed form. The 2010 advance payment could be as much as $1,830; workers without a qualifying child could not get advance payments. Form W-5 expired at year end and had to be renewed each year, and only one could be in effect with a current employer.

How advance payments worked. Under Publication 15 (2010), the advance payment was not subject to income, Social Security or Medicare tax withholding and was added to net pay. The employer reported the yearly total in box 9 of Form W-2, not in box 1, and subtracted it on Form 941. Advance payments were treated as deposits of withheld income tax, then employee Social Security and Medicare tax, then the employer share. In the publication's example, $100 of advance payments against $90 of income tax withholding covered the $90 and $10 of employee FICA, leaving $112.60 of Social Security and Medicare tax to deposit.

Repeal. Section 219 of Public Law 111-226 (August 10, 2010) repealed section 3507, section 32(g) and section 6051(a)(7), effective for taxable years beginning after December 31, 2010. Publication 15 (2011) told employers the advance payment option expired on December 31, 2010 and that employees who received advance payments in 2010 had to file a 2010 return. Today, the Form W-2 instructions say: "Do not enter an amount in box 9."

Where states differ: two examples. Many states have their own credit, and Publication 596 points workers to IRS.gov/EITC for a list. As examples, California's Franchise Tax Board describes a CalEITC of up to $3,756 for tax year 2025 for workers earning up to $32,900, claimed on form FTB 3514. California also has its own employer notice: the Employment Development Department says employers required to provide unemployment insurance must give employees an EITC notification within one week before, after or at the same time as the annual wage summary (such as Form W-2 or 1099), in substantially the language EDD provides, by hand, by mail to the last known address, or by email if the employee opts into electronic delivery; a bulletin board posting does not count. New York's Department of Taxation and Finance says its state credit is generally 30% of the allowable federal credit, reduced by any household credit, and is fully refundable for full-year residents. Other states' rules vary; see state withholding tax for state payroll obligations.

Question: Does an employer have to check whether an employee qualifies? Publication 15 section 10 requires a notice, not an eligibility decision. Notice 1015 says the basic requirements are in Notice 797 and directs employees to Publication 596 or the Form 1040 instructions.

Question: When will an employee who claims the credit get a refund? The IRS says that, by law, it must wait until mid-February to issue refunds to taxpayers who claim the EITC.

Question: Does the refund affect public benefits? Publication 596 says an EIC refund cannot be counted as income for eligibility under any federal program, or state or local program financed in whole or part with federal funds, such as TANF, Medicaid, SSI, SNAP and low-income housing, and cannot be counted as a resource for at least 12 months.

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