Special Rules Regarding Earned Income
Household Employees
If a taxpayer was a household employee but did not receive Form W-2 because an employer paid less than $2,700 for 2024 ($2,800 for 2025), the EIC may still be available. Include the amount paid on the “Household employee wages not reported on Form(s) W-2” line of Form 1040 (line 1b on the 2024 version).
Combat Pay Election
A taxpayer may elect to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the EIC. Making this election for EIC purposes may or may not be advantageous.
If the taxpayer has earned income below the maximum amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount. On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to include combat pay as earned income will decrease the amount of credit that can be claimed.
Disability Benefits
If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age. Minimum retirement age generally is the earliest age at which a taxpayer could have received a pension or annuity if he/she were not disabled. Beginning on the day after reaching minimum retirement age, payments a taxpayer receives are taxable as pensions and are not considered earned income. Note: Non-taxable disability income attributable to premiums paid by an employee is not “earned income” for purposes of the EIC. (Chief Counsel Advice 199916041; Eva B. Vellai-Palotay v. The United States, U.S. Court of Federal Claims; l6-125T, July 13, 2016.)
Taxpayer or Qualifying Child Dies During Tax Year
The fact that the taxpayer dies during the year, or that the dependent dies during the year, will not necessarily preclude the deceased taxpayer from claiming the EIC. The Service’s position has long been that, if the child fails the more than half the year rule because the child died or was born during the year, the child will meet that rule if the child lived with the taxpayer for the entire time the child was alive for the year, including temporary absences (Pub 596). As for the death of the taxpayer, Section 32(e) provides as follows: taxable year must be a full taxable year - Except in the case of a taxable year closed by the reason of the death of the taxpayer. (PMTA 2007-01190)
Voluntary Salary Reductions Under Cafeteria Plans
A cafeteria plan is a benefit plan that allows choosing among two or more benefits consisting of cash and benefits that aren’t taxed. If a taxpayer chooses a benefit that isn’t taxed (such as accident and health insurance), the amount of the voluntary salary reduction is NOT earned income when figuring this credit.
Birth of a Qualifying Child During the Year
If the child fails the more than half the year rule because the child was born during the year, the child will meet that rule if the child lived with the taxpayer for the entire time the child was alive for the year, including temporary absences. (Pub 596)
Earnings While an Inmate
Amounts paid to inmates in penal institutions for their work are not earned income when figuring the earned income credit (IRC Sec 32(c)(2)(B)(iv)).
Earnings from Self-Employment
Earnings from self-employment are considered earned income for purposes of the credit.
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Statutory employee's earnings: If a taxpayer is a statutory employee, self-employment earnings is the amount on line 1 of Schedule C.
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Other earnings: Earnings from self-employment for services as a minister or member of a religious order, is earned income for the credit., Taxpayer must include these earnings in earned income even if net earnings are less than $400.
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Losses from self-employment: A loss from self-employment must be subtracted from other earned income.
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Schedule SE: Using the optional methods to figure SE tax on net earnings from self-employment may qualify a taxpayer for the earned income credit or give a larger credit if net earnings (determined without using the optional methods) are less than the year’s “lower limit”. If a taxpayer uses the optional method, use the imputed income from the optional SE method calculation in lieu of the actual SE earnings, reduced by the SE tax deduction claimed as an adjustment to gross income on Form 1040 (line 15 of Schedule 1).
If Schedule SE isn’t required (for example, because net earnings from self-employment are less than $400), and the optional method isn’t used, earnings (or loss) from self-employment is the net profit or loss from self-employment activities. This is the amount that must be used to figure the EIC.
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Ministerial income: Amounts received for performing ministerial duties as an employee count as earned income for EIC purposes. This includes wages, salaries, tips, and other taxable employee compensation. This is true even if a taxpayer has an approved Form 4361 (exemption from self-employment tax for ministers), i.e., amounts received for performing ministerial duties as an employee are earned income. However, a nontaxable housing allowances or the rental value of a parsonage that is received as part of pay for services as an employee is not earned income for EIC. Amounts received from ministerial duties, but not as an employee, are not earned income. Examples include fees for performing marriages and honoraria for delivering speeches. Similarly, if an individual has an approved Form 4029 (exemption from Social Security and Medicare taxes), all employee compensation counts as earned income for EIC but amounts received as a self-employed individual do not count as earned income.