Question

Describe a cafeteria plan and discuss why an employer would provide a cafeteria plan for its employees.

Why is the earned income credit referred to as a negative income tax?

Answer 1

1. cafeteria plan: A cafeteria plan is an employee benefit plan that allows staff to choose from a variety of pretax benefits. A cafeteria plan also refers to as a "flexible benefit plan".

why an employer would provide a cafeteria plan for its employees: - A cafeteria plan gets its name from a cafeteria, where individuals select their food of choice, employees may choose the benefits of their choice before taxes are calculated. These plans become more useful as diversity within work forces continues to grow and employees seek personalized benefits.

- Cafeteria plan selections include insurance options, such as contributions to health savings accounts, or group term life insurance and disability insurance.

2. The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers earning relatively low wages.

There are two major purposes of the EITC. First, the credit was meant to encourage the nonworking poor with children to enter the workforce. Second, the credit was intended to help reduce the tax burdens of working poor families with children.

There are two tax credit programmes: A. Earned Income Tax Credit (EITC)

B. Child Tax Credit (CTC)

The tax credits include a “refundable” portion which is paid to individuals and families that owe no income tax for the year. Therefore, this portion of the tax credits act as “negative income tax” and serves as a welfare program to support low-income working families with children.