Form W-5 allowed eligible employees to get a part of their Earned Income Credit with each paycheck. The purpose of this form was to provide immediate financial relief to workers who qualified for the EIC, thereby improving their monthly cash flow. Employees submitted this form to their employers, who then adjusted their withholding to include the advance EIC payment.
To qualify for advance payments using Form W-5, employees had to meet specific criteria:
Earned Income: The employee needed to have earned income from employment or self-employment.
EIC Eligibility: The employee had to be eligible for the Earned Income Credit, which included meeting income limits, having a valid Social Security number, and filing as a certain tax status (e.g., single, married filing jointly).
Advance Payments: Enabled eligible employees to receive EIC payments throughout the year.
Annual Submission: Employees needed to submit a new Form W-5 to their employer each year to continue receiving advance payments.
Employer’s Role: Employers were responsible for adjusting the employee’s payroll to include the advance EIC payment and reporting these payments to the IRS.
The IRS discontinued Form W-5 starting in the tax year 2011. The primary reasons for its discontinuation were:
Simplification of Tax Code: To streamline the tax process and reduce complexity for both employers and employees.
Error Reduction: To minimize errors in calculating and reporting advance EIC payments.
After the discontinuation of Form W-5, employees could no longer receive advance payments of the EIC. Instead, they needed to claim the entire credit when filing their annual tax returns. This change shifted the benefit to a lump-sum payment, which some argued could better aid financial planning and reduce administrative burdens.
Even though Form W-5 is no longer in use, employees who qualify for the Earned Income Credit can still claim it when filing their tax returns. Here’s how:
Eligibility Check: Confirm eligibility for the EIC by checking the IRS guidelines for income limits, filing status, and qualifying children.
Form 1040: Use Form 1040 or Form 1040-SR to file your tax return.
Schedule EIC: Complete Schedule EIC to provide information about qualifying children, if applicable.
Electronic Filing: Consider e-filing your tax return for faster processing and quicker refunds.
