California New Employment Credit (NEC)
The California New Employment Credit (NEC) is an employment tax incentive that reduces the California tax liability of a qualified business. The business must operate within a Designated Geographic Area (DGA) and have a net increase in the total number of full-time employees working in California.
If an eligible business qualifies 10 new employees under the NEC in a single year and satisfies the net increase requirements, it would earn a total tax credit up to $672,000 depending on the hourly rate paid to the qualified employee.
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What Is The California New Employment Credit?
For taxable years beginning on or after January 1, 2014 and before January 1, 2021, the California New Employment Tax Credit is allowed to qualify businesses that hire at least one qualified full-time employee and pay qualified wages attributable to work performed by the employee. The tax credit amount equals 35% of the qualified wages incurred for the year.
Qualified wages are that portion of the wages paid that exceed 150% of the minimum wage but do not exceed 350% of the minimum wage.
For example, in 2014 when the minimum wage is $8 per hour, the relevant thresholds would be $12 (150% of $8) and $28 (350% of $8). Therefore, if an employee made $12 or less, then no portion of their wages would be considered qualified wages. If an employee made $13 an hour then $1 would be considered qualified, so you would multiply the total hours worked by $1 to come up with the total qualified wages.
If an employee made $18 an hour and worked a total of 2,000 hours for the year, then the qualified hourly wage amount would be $6 ($18-$12) and the total qualified wages would be $12,000 ($6 x 2,000) for a possible credit of $4,200 ($12,000 qualified wage x 35%).
California New Employment Tax Credit Program Requirements
- Must be an eligible business
- Must be located in a Designated Geographic Area (DGA)
- Must hire qualified employees on or after 1/1/2014 and before 1/1/2021
- Pay qualified wages attributable to work performed in a DGA
- Receive a proper Tentative Credit Reservation from the Franchise Tax Board (FTB) for any qualified employees
- Annually certify all qualified employees as required by the FTB
- Have a net increase in full-time employment positions in California as compared to its base year (latter of 2013 or first year business had employees in California) employment
California New Employment Credit Eligible Businesses
Qualified NEC businesses are those that are located in a DGA and do not fall into one of the following excluded businesses*:
- Temporary Help (NAICS 561320)
- Retail Trade Services (NAICS Sector 44-45)
- Primarily Theater Companies And Dinner Theaters (NAICS 711110)
- Primarily Food Services (NAICS 722511, 722513 and 721120)
- Primarily Drinking Places-Alcoholic Beverages (NAICS 722410)
- Sexually Oriented Businesses – nightclub, bar or similar commercial performances where the nudity is a function of everyday business operations, where nudity is planned and an intentional part of the entertainment.
*These otherwise excluded businesses (except for sexually oriented businesses) may be qualified if the business is considered a small business. A small business has aggregate gross receipts – less returns and allowances reported to California – of less than $2 million during the previous taxable year.
California New Employment Credit Qualified Employees
A qualified employee must meet all of the following requirements:
- Performs at least 50% of service for the qualified taxpayer during the year in a designated census tract or economic development area
- Receives starting wages that are at least 150% of the minimum wage
- Is hired on or after January 2, 2014
- Is hired after the date the Department of Finance has designated the DGA
- Satisfies either of the following two requirements:
- Works at least 35 hours per week on average, or
- Credit has a five-year carryover
- Credit must be claimed on an original tax return (including extensions)
- Credit is not refundable
- Credit is not limited to income from the DGA (as required for the expired Enterprise Zone Credit)
- Credit cannot reduce tentative minimum tax
- Credit is subject to recapture for employees who do not work at least 270 days (law includes several exceptions)
- Credit may be used in conjunction with the California Competes Credit
We look forward to helping you navigate the right route toward optimizing the California New Employment Credit for your business. To learn more or begin your application process, click here to contact a tax expert at CTI today.