How to Claim the California New Employment Credit

The California New Employment Credit (NEC) is a state tax incentive for businesses that hire specific types of employees in designated locations. Its purpose is to stimulate job growth in areas with high unemployment or poverty rates. The credit directly reduces a business’s state income tax liability, and the program is available for employees hired through the end of 2025.

Employer Eligibility Requirements

A business must meet several conditions to be eligible for the New Employment Credit. The taxpayer must be actively conducting a trade or business within a Designated Geographic Area (DGA). Eligibility has also been expanded to include companies in semiconductor manufacturing or research, electric airplane manufacturing, and lithium production. Certain industries are excluded, such as temporary employment agencies, retail stores, and most restaurants, unless they qualify as a “small business.”

A business is defined as “small” if its gross receipts in the prior taxable year were less than $2 million, which allows some otherwise excluded companies to qualify. A requirement for all employers is a net increase in the total number of full-time employees in California for the taxable year. This is measured against the taxable year immediately before the first qualified employee was hired.

If a business relocates into a DGA, it may be eligible for the credit on new hires at that location. This is contingent upon the employer making a written offer of employment with comparable compensation to all employees from the previous, non-DGA location.

Qualified Employee and Wage Criteria

For the credit to apply, a business must hire a “qualified full-time employee.” The individual must be hired after the business location is part of a Designated Geographic Area (DGA) and perform at least 50% of their work services within that DGA. The employee must also meet at least one of the following criteria at the time of hire:

• A veteran separated from the U.S. Armed Forces within the last 12 months
• A recipient of the federal Earned Income Tax Credit in the prior year
• An ex-offender convicted of a felony
• A recipient of CalWORKS or other local assistance

Another category is for individuals who have been unemployed for the six months immediately preceding their hire date. For this purpose, being “unemployed” means the person was not receiving wages, was not self-employed, and was not a full-time student. A recent college graduate must have graduated at least 12 months before being hired to qualify under this provision.

An hourly employee is considered “full-time” if paid for an average of at least 35 hours per week, while a salaried employee must be paid for what is considered full-time work. “Qualified wages” are the portion of an employee’s pay that is more than 150% but not more than 350% of the state minimum wage. The credit is calculated based on these wages for the first 60 months of employment.

Designated Geographic Area Requirement

The geographic location of the work performed is a central component of the New Employment Credit. The credit is available for wages paid to qualified employees working within a Designated Geographic Area (DGA), which are regions with high rates of unemployment and poverty.

The Franchise Tax Board (FTB) provides a DGA lookup tool on its website that business owners must use to verify an address is within a qualifying census tract. The state periodically re-evaluates these census tracts, with the most recent re-designation effective January 1, 2025.

Because boundaries can change, employers must use the official DGA lookup tool to verify a location’s eligibility for the specific hiring period. If an employee is hired while a location is eligible, they can continue to generate the credit for the full 60-month period, even if the work location is later removed from the DGA.

Information and Forms Needed to Claim the Credit

To claim the New Employment Credit, a business must complete FTB Form 3554. This requires compiling records for each qualified employee, including their start date, wage or salary, and total hours worked during the tax year. You will also need documentation to support the employee’s qualification status, such as proof of unemployment or veteran status.

The current version of Form 3554 and its instructions are available on the FTB’s website. Part I of the form focuses on calculating the net increase in full-time employees by comparing the current year’s total to the base year. Part II is used to compute the tentative credit by multiplying the total qualified wages by the 35% credit rate. The form requires the business’s identifying information, such as its name and Employer Identification Number (EIN), and the details gathered for each qualified employee.

The Claim Process

The first step in claiming the credit is to request a Tentative Credit Reservation (TCR) from the Franchise Tax Board (FTB) for each qualified employee. This reservation must be made online through the FTB’s website within 30 days of filing the new hire report with the Employment Development Department (EDD). Upon successful submission, the employer will receive an immediate confirmation. A TCR is mandatory to claim the credit for an employee.

In addition to securing a TCR, employers must complete an annual online certification of employment for each qualified employee from previous years. This certification must be submitted to the FTB each year to continue claiming the credit for that employee.

After securing the TCR and completing Form 3554, the final step is to attach the form to the business’s timely filed original California income tax return. The credit cannot be claimed on an amended return. Any unused credit amount can be carried forward for up to five years.