Indian Employment Tax Credit

The Indian employment tax credit provides businesses with an incentive to hire registered Native Americans and their spouses who live on or near an Indian reservation. The business itself does not have to be in an Indian reservation, empowerment zone or any other specially designated area to qualify for this tax credit.  You may claim the credit if you pay or incur “qualified wages” to a “qualified employee.”

What Is A Qualified Indian Employment Credit Employee?

A qualified Indian employment credit employee, for any tax period, is any employee who meets all of the following requirements:

  • The employee is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe.
  • The employee performs substantially all of his or her services for you within an Indian reservation.
  • While performing those services, the employee makes his or her main home on or near that reservation.
  • Also, more than 50% of the wages you pay or incur to the employee during the year must be for services performed in your trade or business.
The following defines non-qualified employees of the Indian employment tax credit:
  • Any employee to whom you pay or incur wages (including wages for services outside an Indian reservation) at a rate that would cause you to pay the employee more than $30,000 if the rate applied for an entire year
  • Certain related taxpayers
  • Certain dependents
  • Any 5% owner
  • Any individual who performs services involving certain gaming activities
  • Any individual who performs services in a building housing certain gaming activities

Qualified Indian Employment Credit Wages: Qualified Indian employment credit wages are any wages you pay or incur for services performed by an employee, while the employee is a qualified employee (defined earlier). Wages are generally defined as those wages subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.

Also, qualified Indian employment credit wages include health insurance costs you pay or incur on behalf of a qualified employee. However, this does not include any amount you pay or incur for health insurance under a salary reduction arrangement.

The total amount of qualified wages (including qualified employee health insurance costs) you can use to determine the tax credit cannot be more than $20,000 for each employee each tax year.

Effect Of Work Opportunity Tax Credit (WOTC): Qualified Indian employment credit wages do not include any amount you pay or incur for work performed by a qualified employee during the one-year period beginning on the date the individual begins work for you, if you use any part of these wages to claim the WOTC.

Amount Of The Indian Employment Tax Credit: In most cases, the credit is 20% of the excess of your current-year qualified wages and qualified employee health insurance costs over the sum of the corresponding amounts you paid or incurred during calendar year 1993.

Claiming The Indian Employment Tax Credit: To claim the Indian employment tax credit, use IRS Form 8845.

Effect On Salary And Wage Deduction: In general, you must reduce the deductions on your income tax return for salaries, wages and health insurance costs by the amount of your Indian employment credit.

Early Termination Of A Qualified Employee: Generally, if you terminate a qualified employee sooner than one year after the date of initial employment, you may not claim a credit for that employee for the tax year the employment is terminated. Also, you may have to recapture tax credits allowed in earlier years.

These rules do not apply in the following situations:

  • The employee voluntarily quits.
  • The employee is terminated because of misconduct.
  • The employee becomes disabled (however, if the disability ends before the end of the first year of employment, you must offer reemployment to the former employee).

At CTI, we help you identify and route an efficient course towards claiming the Indian employment tax credit. Our goal is to partner with you to maximize your tax savings and ensure your reporting and documentation fulfills all federal requirements.

To learn more, take advantage of our free tax credit and incentives review by clicking here to connect with a tax expert at CTI.