The IRS allows low-income employees to claim an earned income credit (EIC) against their federal taxes on their federal tax returns.
Using Form W-5, employees who qualify can request advance payments of their expected EIC in the form of reduced withholding from their paychecks during the year.
Employers report these advances when they file their quarterly or annual tax returns.
Note: Effective January 1, 2011, the option for advance EIC payments has been eliminated. Individuals eligible for the EIC may still claim it on their personal income tax returns, but employers may no longer advance a portion of the credit with each paycheck.
For detailed information and current IRS requirements, contact the IRS.