The Indian employment credit provides businesses with an incentive to hire certain individuals who live on or near an Indian reservation. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified wages" to a "qualified employee."
At the time this publication was printed, this credit was set to expire for tax years beginning after 2004.
A qualified employee, for any tax period, is any employee who meets all the following tests.
- 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 has 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 individuals are not qualified employees.
- 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 the wage limit if the rate applied for an entire year. (The wage limit was $35,000 for 2003 but may be adjusted for inflation for tax years beginning after 2003.)
- 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 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 wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit.
Also treat as qualified wages any qualified employee health insurance costs you pay or incur on behalf of a qualified employee. However, do 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 figure the credit cannot be more than $20,000 for each employee each tax year.taxmap/pubs/p954-010.htm#TXMP28f885de
Qualified wages do not include any amount you pay or incur for work performed by a qualified employee during the 1-year period beginning on the date the individual begins work for you, if you use any part of these wages to claim the work opportunity credit.taxmap/pubs/p954-010.htm#TXMP05d60e52
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.taxmap/pubs/p954-010.htm#TXMP5ed0556e
Use Form 8845 to claim this credit.taxmap/pubs/p954-010.htm#TXMP2d6e9570
In general, you must reduce the deductions on your income tax return for salaries and wages and health insurance costs by the amount of your current year Indian employment credit (before applying the tax liability limit).taxmap/pubs/p954-010.htm#TXMP0af0b0f0
Generally, if you terminate a qualified employee sooner than 1 year after the date of initial employment, you cannot claim a credit for that employee for the tax year the employment is terminated. Also, you may have to recapture 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.
For more information about the Indian employment credit, see Form 8845.