Indian Employment Credit: Definition & Overview

KEY TAKEAWAYS

• Indian Employment Credits are tax credits.
• They provide a 20% reduction on a business’s capital income.
• It is offered to businesses that employ registered Native Americans.

What Is the Indian Employment Credit?

The Indian Employment Credit (IEC) is a financial incentive provided by the US Federal Government in the form of a tax credit. It is given to employers who hire indigenous persons who have registered with the IRS. It includes the spouses of those individuals who have registered with the IRS, and who reside on or near an indigenous reservation and work for an employer on that reservation.

To encourage firms to hire certain employees, the tax credit offers a 20% tax credit on qualified income and perks. The IEC was originally set to expire on December 31, 2007, but this has since been continuously renewed by acts of Congress and is now valid as of the year 2020.

The IEC is designed to give firms extra incentives to employ a historically underrepresented demographic. The IRS administers the IEC, which is a tax break provided by the US Federal Government to businesses that employ indigenous persons or the spouses of indigenous persons who reside on or close to reservations. For each qualified employee they hire, employers are permitted to deduct eligible salaries as well as qualified employee health insurance expenditures.

Who Qualifies for Indian Employment Credit?

The tax credit is offered by the United States Federal Government to employers. The credit can only be claimed by employers who paid wages and/or health insurance costs for a qualified employee during the tax year. Qualified employees must meet all three criteria: 

1. Employee is an enrolled member (or spouse of the member) of an indigenous community. 
2. Substantially all the services performed by the employee for the employer are performed within an indigenous reservation. 

The employee’s principal residence while performing services is on or near the reservation where the services are provided.

How to File for Indian Employment Credit Tax?

IEC claims must be made on IRS Form 8845 by partnerships and S companies. Depending on whether the source credit originates from a beneficiary, employers that are estates or trusts may record the credit on Form 8845 or IRS Form 3800, General Business Credit. Before deciding where to report the Indian Employment Credit, cooperatives must first calculate their overall tax obligations.

Summary

The IEC is a financial incentive for employers. It is in the form of a tax credit provided by the United States Federal Government to employers who employ recognized indigenous persons.

The IEC is a great incentive to diversify a business’s workforce. This is whilst also making tax savings on capital costs and payroll costs.