What Are the Rules for the Indian Employment Credit?

The Indian Employment Credit was a federal tax incentive available to businesses, designed to encourage employment and economic growth within designated Native American communities. This credit directly reduced an employer’s tax liability, providing a financial benefit for hiring qualifying individuals who lived and worked on or near an Indian reservation. Administered by the Internal Revenue Service (IRS), the credit was a component of the general business credit. The credit expired for tax years beginning after December 31, 2021, and has not been renewed by Congress.

Employer Eligibility Requirements

To have qualified for the Indian Employment Credit, an employer had to be engaged in a trade or business. This requirement ensured the credit was directed toward active commercial enterprises rather than passive investment activities. The business did not need to be owned by a tribal member; any commercial operation could potentially claim the credit, provided it met all the necessary criteria for its employees and their work location.

An Indian reservation was specifically defined under federal law. The IRS maintains a list of federally recognized tribes, which helped employers verify the status of the location where their employee worked. This location-based requirement was strict and directly linked the tax benefit to economic activity on tribal lands.

Qualified Employee Criteria

For an employer to have claimed the credit, the employee had to meet several specific conditions. The individual had to be an enrolled member of a federally recognized Indian tribe or be the spouse of an enrolled member. The term “Indian tribe” was broadly defined to include any tribe, band, nation, or other organized group, including Alaska Native villages, that the U.S. government recognizes as eligible for special programs.

In addition to tribal affiliation, the employee had to maintain a principal place of abode on or near the Indian reservation where they worked. Substantially all of the services performed by the employee for the employer during the tax year had to be conducted within the boundaries of an Indian reservation.

Certain individuals were specifically excluded from being classified as a qualified employee, regardless of meeting the primary criteria. An employee who was a 5% owner of the business was not eligible. Additionally, individuals whose work was related to specific gaming activities, as defined by the Indian Gaming Regulatory Act, or who worked in a building that housed such gaming, could not be considered qualified employees for this credit. An employee was not considered qualified if the total wages paid to them by the employer during the tax year exceeded $50,000.

Calculating and Claiming the Credit

The Indian Employment Credit was calculated as 20% of the excess of qualified wages and employee health insurance costs paid in a given year over the amount of those same costs paid during 1993. This formula meant the credit was only available for the increase in wages and health benefits paid to qualified employees compared to the amount paid in 1993. If the employer had no such costs in 1993, the credit was based on the full amount of that year’s costs.

“Qualified wages” were the wages paid to a qualified employee, but only up to a certain limit. For the purpose of the credit calculation, only the first $20,000 of wages and health insurance costs paid to each qualified employee during the tax year were considered. Any wages paid above this $20,000 threshold were disregarded when computing the credit amount. This cap focused the benefit on a specific portion of the employee’s compensation.

Qualified employee health insurance costs were amounts paid by the employer for health coverage for the qualified employee, provided these amounts were excluded from the employee’s gross income. These costs were added to the qualified wages before the 20% credit rate was applied. Wages used to claim the Work Opportunity Tax Credit (WOTC) could not also be used to calculate the Indian Employment Credit. Employers had to choose which credit to apply to an eligible employee’s wages.

A rule associated with this credit was that the employer’s business deduction for salaries and wages had to be reduced by the amount of the Indian Employment Credit claimed. This prevented the employer from receiving a double tax benefit—a deduction and a credit—on the same expense. This reduction applied even if the employer could not use the entire credit in the current year due to tax liability limitations.

Employers used Form 8845, Indian Employment Credit, to calculate the specific amount of the credit. The final credit amount calculated on Form 8845 was then reported on Form 3800, General Business Credit, which was filed along with the business’s primary income tax return.