How much should I send for a tax payment in order to receive the maximum in Earned Income Credit and Child Tax Credit?

[Zitro]

Hello, I am self employed with very low annual earnings ($5,000) Last year, I made a $300 payment to IRS for taxes so I would qualify for the earned income credit and child tax credit. I got a $2,072 refund. I am wondering if I should send a larger payment and if so how much, in order to get the maximum credit and refund for the EIC and CTC?

Thank you for your time.

[KarenL4]

Hi, Zitro,

The EITC and the CTC are calculated independently of how much money you pay in for self-employment taxes.  You do have a requirement to pay in your federal taxes quarterly (including SE Taxes) if you will owe more than $1K (I am not addressing state requirements here).  This article explains more.  Eligibility for the EITC (which is a refundable credit-- which means you can get back more than you paid in taxes) is mostly based on family size and income and is discussed here.  The CTC is a partially refundable credit and it's discussed here. Eligibility for the CTC has a number of factors.

Hope this helps!

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Regards,

Karen

[marctu · Accepted solution]

So, I would specifically discourage you strongly from making any payments to the IRS if your income is limited to Self-Employment income of $5,000.   The reason is that both the Earned Income Tax Credit and the Child Tax Credit both require earned income, and not the payment of taxes, be it income or self-employment taxes.

The Earned Income Tax Credit (EITC) is a tax credit that may give you money back at tax time or lower the federal taxes you owe. You can claim the credit whether you’re single or married or have children or not. The main requirement is that you must earn money from a job or self-employment. 

The credit can get rid of any federal tax you owe at tax time. If the EITC amount is more than what you owe in taxes, you get the money back in your tax refund. If you qualify for the credit, you can still get a refund even if you do not owe income tax.

See this article for more details: What is the Earned Income Credit? Find Out If You Qualify 

The Child Tax Credit is determined by and phases in with one’s earnings: Anyone earning less than $2,500 annually is currently ineligible to claim the credit. Starting at $2,500 in earnings, the credit phases in at a 15% rate, meaning for every $100 earned above $2,500, a taxpayer receives $15 in CTC. For example, a taxpayer with $3,500 in earnings would receive $150 in CTC ($3,500 – $2,500 = $1,000; $1,000 * 15% = $150). A taxpayer with multiple children must phase in the credit amount one child at a time.

See this article for more details:2023 and 2024 Child Tax Credit 

So, to summarize neither credit requires the payment of taxes.  In effect, the $300 you paid was returned to you as part of the $2,072 refund.  The refund most likely would have been $1,772 if you did not make the payment.  Unless your self-employment is much higher in 2024, you should not make a payment as neither credit requires a tax payment to be made to qualify for the credits.

Thank you for the opportunity to answer your questions @Zitro 

All the best,

Marc T.

TurboTax Live Tax Expert

[Zitro]

Thank you, this information is helpful. However, I found this not to be the case in 2022. I did not make any payments because my income was so low but then I was not eligible for either credit because I reported no earned income. Last year, when I made the $300 payment, I then got both credits. I guess I cannot claim an EIC or CTC if I do not report any income?  

[marctu]

So to capture what you are following up on:

2022:  $0 Earned Income = no Earned Income Tax Credit and no Child tax Credit

2023:  $5,000 Earned Income and $300 Tax Payment = Tax Refund of $2,072 with the components of the refund being some Earned Income Credit and some Child Tax Credit.   Also at $5,000 of self-employed income there is some self-employment tax paid as well.      

The point is that the key to both credits is earned income not the payment of taxes.  This is a which came first the chicken or the egg scenario here.   I think you can make better use of the $300 during the course of the year rather then waiting for the $300 being returned to you when you file your tax return and then after the IRS processes the refund. 

Thank you for the opportunity to answer your questions @Zitro 

All the best,

Marc T.

TurboTax Live Tax Expert

[Zitro]

but if I don't make a payment, like in 2022, than how do I claim that I earned self-employment income? In 2022, I was told that because I didn't report making any income, I was not entitled to any credits. It seems I had make a payment in 2023, to report the income and qualify for the credits.

[KarenL4]

Hi,

The self employment income gets reported on your SCH C as part of your personal income tax return.  You are required to file a personal income tax return if you have more than $400 of net self-employment income.  You will not be eligible for the EITC unless you have earned income (e.g., reported self-employment income or W-2 income).

Hope this helps.

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**Mark the post that answers your question by clicking on "Mark as Best Answer"

Regards,

Karen

TurboTax Expert

[marctu]

Reporting income and making a payment are two separate actions.   When you are self-employed you are going to file a Schedule C to report the income from your self-employment activity and then you will report your expenses that will then get you to net self-employment income.   The net-self employment income will then allow, assuming that it is in the range of $5K that the question started with, generate some level of Earned Income Tax Credit and assuming you have a qualifying child(s), some level of the Child Tax Credit.   

Payments to the IRS that you make are reported either as estimated tax payments or extension payments.  The payment of taxes, in your case $300, is not the key to either credit again.  It is the fact that both credits require earned income, not the payment of taxes. 

Thank you for the opportunity to answer your questions @Zitro 

All the best,

Marc T.

TurboTax Live Tax Expert

[Zitro]

In 2022, when I waited to report my self-employment income at the end of the year, on the Sch C., I had paid no taxes, thus didn't qualify for any credits.

[marctu]

The key point again for 2022 is as you wrote and I summarized:

2022:  $0 Earned Income = no Earned Income Tax Credit and No Child tax Credit.  

If you paid $300 in taxes in 2022, like you did in 2023, you would have received the $300 you paid back, and still with $0 Earned Income there is no Earned Income Tax Credit and No Child Tax Credit. 

Thank you for the opportunity to answer your questions @Zitro 

All the best,

Marc T.

TurboTax Live Tax Expert

[Zitro]

In 2022, I reported around the same, $5000 earned on my schedule C but di not qualify for the credits. The only thing I did different was in 2023, I made a $300 payment, then I qualified for the credits. I think I will do the same this year, just to be sure I receive the credits again. Thank you for answering my main question, which was if I can get a bigger credit by paying a larger tax payment.