Program Management

Earned Income Tax Credits

Introduction

In our first learning guide on the topic of taxes and social enterprise employees, we made the case for the importance of encouraging your social enterprise’s employees to file their taxes. One of the particular benefits of doing so for them is to take advantage of federal tax credits. Perhaps the most famous and significant tax credit that many may qualify for is the Earned Income Tax Credit (EITC). In this learning guide, we will explore in greater detail what the EITC is, who is eligible, and its value. At the end of this resource, you can look up details related to the EITC program in your state.

 

Earned Income Tax Credit

In order to encourage paid employment and reduce the tax burden on low-to-moderate income individuals and families, the federal government enacted the Earned Income Tax Credit (EITC). The EITC supplements the wages of qualifying workers to increase their overall earning power and to reduce dependency on public benefits. EITC benefits 42% of American workers that make less than $15 an hour. In 2017, the average amount received by workers was $2,470.

Research indicates that families mostly use the EITC to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.

Social enterprises can ensure that their employees are filing their tax returns to then potentially claim the EITC. The detailed information below will illustrate the extra earnings that could go into enterprise employees’ pockets through the EITC and how to connect employees with free tax preparation sites.

 

Federal EITC Eligibility & Value

The amount of Federal EITC depends on income, marital status, and number of children. Workers receive the credit beginning with their first dollar of earned income; the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels. The EITC is refundable, which means that if it exceeds a low-wage worker’s income tax liability, the IRS will refund the balance to the low-wage worker.

Qualifying Children Family Income (single) Family Income (married) Maximum EITC
Zero $15,270 $20,950 $519
1 $40,320 $46,010 $3,461
2 $45,802 $51,492 $5,716
3 or more $49,194 $54,884 $6,431

For tax season 2017, working families with children that have annual incomes below $40,320 to $54,884 (depending on marital status and the number of dependent children) may be eligible for the federal EITC. Also, working-poor individuals who have no children and have incomes below $15,270 (about $20,950 for a married couple) can receive a very small EITC. Many social enterprise employees are non-custodial parents.

To make sense of the chart above, if a social enterprise employee who is not married, has no (qualifying) children, and has a total annual household income less than $15,270, the employee could claim a maximum of $519 in EITC. If a social enterprise employee who is married, has no (qualifying) children, and has a total annual household income less than $20,950, the employee could claim a maximum of $519 in EITC. The credit amounts only get higher with the increase in both qualifying children and income.

For social enterprises working with the reentry population, it is worth noting that the IRS does not consider income earned while in prison, in a work release program, or in a halfway house, earned income for the purpose of calculating EITC.

The IRS has created the online EITC Assistant at www.irs.gov to help you determine if you, or your employees, are eligible. The 2018 tax year versions in both English and Spanish will be available in January, 2019.

 

State EITC Programs

In addition to the federal EITC, twenty-six states plus the District of Columbia have created their own EITC programs to supplement the federal credit. Most states with state EITCs set their benefit as a percentage of the federal credit, making the state credit easy to administer.

Use the tool below to learn about your state’s EITC program.

Conclusion

Whether or not your social enterprise operates in a state with its own EITC program, the federal EITC can amount to a significant amount of money for your employees. You should encourage your social enterprise employees to file their taxes and make sure that they are aware of the EITC and other tax credits for which they may qualify. In our next learning guide, we will explore resources that your employees can take advantage of to help them access the refunds that are due to them. We will also share strategies on how to encourage your employees to take advantage of these resources and file their taxes.

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