How to Claim the Empowerment Zone Employment Credit
Understand the tax provisions for hiring employees in an Empowerment Zone. This guide explains the financial qualifications and filing process for the credit.
The Empowerment Zone Employment Credit is a federal tax incentive designed to encourage economic growth in designated distressed urban and rural areas. It provides a credit to businesses for wages paid to employees who both live and work within these specific zones. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended all existing Empowerment Zone designations through December 31, 2025, allowing businesses to continue utilizing this benefit.
Determining Eligibility
To qualify for the Empowerment Zone Employment Credit, a business must actively conduct operations within a federally designated Empowerment Zone (EZ). An EZ is an area with a high rate of poverty and unemployment that has been granted special status to encourage development. Businesses can verify if their address falls within a designated zone by using the Empowerment Zone Address Locator tool provided by the Department of Housing and Urban Development (HUD).
The employee for whom the credit is claimed must also meet certain requirements. The individual must have his or her principal residence within the same EZ where the business is located. A substantial portion of the services performed by the employee must also be conducted within that zone.
Certain individuals are not considered qualified employees, even if they meet the live and work requirements. This exclusion applies to relatives of the business owner, including children, stepchildren, siblings, and parents. Individuals who own more than 5% of the business, whether it be a corporation, partnership, or sole proprietorship, are also ineligible.
Calculating Qualified Wages and the Credit
The calculation of the Empowerment Zone Employment Credit begins with identifying “qualified wages.” These are wages paid to a qualified employee for services performed within the Empowerment Zone. Any wages that were used to claim the Employee Retention Credit (ERC) are not considered qualified wages for the Empowerment Zone Employment Credit.
There is a cap on the amount of wages that can be used for the calculation. For each qualified employee, only the first $15,000 of wages paid during the calendar year are considered for the credit.
The credit is calculated as 20% of the qualified wages. For example, if a qualified employee earns $25,000 during the year, the business can only consider the first $15,000 as qualified wages, resulting in a $3,000 tax credit. If another qualified employee earned $12,000, the entire amount would be considered qualified wages, and the credit would be 20% of $12,000, or $2,400.
How to Claim the Credit
To claim the Empowerment Zone Employment Credit, businesses must use IRS Form 8844, Empowerment Zone Employment Credit. On this form, the employer enters the total qualified zone wages paid during the calendar year. Businesses can download the form and its accompanying instructions from the IRS website.
After calculating the total credit on Form 8844, the amount is transferred to Form 3800, General Business Credit. The Empowerment Zone Employment Credit is a component of the general business credit, which consolidates several different business tax credits. Form 3800 is then filed along with the business’s annual income tax return.
The specific income tax return used depends on the business structure. For example, a corporation would file Form 1120, a partnership would file Form 1065, and a sole proprietor would attach the forms to their Schedule C on Form 1040.