Schedule W - Employment Incentive Payments Credit (Page 4 of 4) in pdf

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GENERAL INFORMATION (continued)

In calculating the conditional EIP Credit, the employer's tax year must

VI. TOTAL LIMIT OF CREDIT AGAINST TAX

be distinguished from each employee's employment (EIP) year. For

An employer may not use credits exceeding 90 percent of its tax liabili-

the purpose of this calculation, the tax year is usually twelve (12)

ty in any given year. Any unused credit may be applied to any of the ten

months. The employee's EIP year begins with the first full month after

(10) immediate succeeding years as long as the total credits used do

the date the employee is hired. For example, an employee hired on

not exceed 90 percent of the tax liability for that particular year. Tax lia-

October 18, 2001 has an EIP year beginning on November 1, 2001

bility is defined as tax liability less any credits not prepaid in the form of

and ending on October 31, 2002.

withholding, estimated, or tentative tax prepayments.

The employer calculates the conditional EIP Credit by determining the

For example:

number of full months the employee worked during the tax year and

(a) At the end of the tax year, the employer has qualified for a maxi-

the amount of actual wages paid during those months. The employer

mum EIP Credit of $675. On his tax return he may claim an EIP Credit

will then calculate the maximum EIP wages by multiplying the number

limited to 90% of his net tax liability. Net tax liability is the total tax due,

of months worked by $750. (The amount is used because a tax year

based on income, less any credits for taxes paid by Pennsylvania res-

is usually 12 months and the maximum EIP wage is $9,000 per year,

idents to other states and/or TAX BACK/Tax Forgiveness. The

$9,000 ÷ 12 = $750 per month.) The conditional EIP Credit is calcu-

employer may not deduct prepaid taxes; i.e., credits for income taxes

lated using the lesser of the maximum EIP wages or the actual wages

withheld and/or estimated tax payments, in calculating net tax liability.

paid. The calculation for the conditional EIP Credit is as follows:

On his tax return, the employer has an income tax liability of $825.

1. $750 x months worked during the tax year = maximum EIP wages;

The employer also made $200 in estimated tax payments and has a

2. Maximum EIP wages compared to actual wages paid;

resident credit of $325 for taxes paid to another state. The employer’s

net tax liability is $500 ($825 total tax due — $325 resident credit).

3. Lower wage figure x appropriate yearly % = maximum EIP Credit.

The employer then multiplies the net tax liability by 90% to calculate

Example:

the actual EIP Credit allowed on his tax return or $500 net tax liability

On September 18, 2001 an employer hires a certified individual. The

x .90 = $450 actual EIP Credit.

employee’s EIP year is October 1, 2001 through September 30, 2002.

Since the employer may use only $450 of his maximum EIP Credit

The employer’s tax year is January 1, 2001 through December 31,

on his tax return, he has available a credit of $225 ($675 maximum

2001. During the three full months (October to December) the employ-

EIP Credit - $450 actual EIP Credit used) for use in any of ten sub-

ee worked in the employer’s tax year, he was paid $3,000. The calcu-

lation of the maximum EIP Credit is as follows:

sequent years.

$750 x 3 = $2,250

(maximum EIP monthly wage x months

(b) At the end of the tax year, ABC, Inc. has qualified for a maximum EIP

worked = maximum EIP wages)

Credit of $2,250. The corporation’s EIP Credit is limited to 90% of the

net tax due less any Neighborhood Assistance Credit. As in the exam-

$2,250 - $3,000

(maximum EIP wages compared to actual

ple above, a corporation may not take the amount of prepaid taxes; e.g.,

wages paid)

tentative tax payments, as a credit to arrive at net tax liability.

$2,250 x .30 = $675

(lesser of wage figures x first year percentage

On the tax report, ABC, Inc. has a tax liability of $3,000. The corpora-

= maximum EIP Credit)

tion has a Neighborhood Assistance Credit of $1,000. The corporation’s

The employer is entitled to a maximum conditional EIP Credit of $675

net tax liability is $2,000 ($3,000 total tax due —$1,000 Neighborhood

for the first three full months the employee worked.

Assistance Credit). The corporation then multiplies the net tax liability by

90% to calculate the actual EIP Credit allowed on the tax report or

In 2002 the employer will perform a similar calculation to determine

$2,000 net tax liability x .90 = $1,800 actual EIP Credit.

the remaining EIP Credit for the employee’s first EIP year and the

conditional credit for the first three months of the employee’s second

Since ABC, Inc. may use only $1,800 of the maximum EIP Credit on

EIP year.

the tax report, the corporation has available a credit of $450 ($2,250

maximum EIP Credit - $1,800 actual EIP Credit used) for use in any

APPLICATION OF CREDIT

of ten subsequent years.

An employer may claim the credit only against a tax which he is

required to pay. Thus, a corporate employer may not assign the cred-

VII. CLAIMING THE CREDIT AND VERIFYING

it to a shareholder or to a subsidiary corporation. An employer

EXISTENCE OF CARRYOVER CREDIT AMOUNT

(whether corporate or individual) shall not use the credit against taxes

To claim credit on the employer’s tax return, the employer must submit

withheld for employees.

copies of the Employment Incentive Certificates [use REV-1601(A) for

In the case of a partnership or PA S corporation the credit will be allo-

all appropriate employees] together with PA Schedule W which must be

cated among the partners or shareholders in the same manner as

attached to the employer’s corporation or Personal Income Tax return.

income is allocated.

The Department will verify the amount of each credit taken and will

A married taxpayer who uses the credit against his Personal Income

notify the employer in writing of the existence of any carryover credit

Tax liability must file a separate return and cannot file jointly with his

which might be available for use during subsequent tax years. To uti-

spouse.

lize any carryover credit in a subsequent year, a copy of the

Any taxpayer required to make estimated tax payments may apply this

Department’s notification will be required to be submitted with that

credit against such payments.

year’s tax return.

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Schedule W - Employment Incentive Payments Credit Page 4

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