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
At the time this publication was printed, this credit was set to
expire for tax years beginning after 2003.
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
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 $30,000 if the rate applied for an
entire year. (This wage limit may be adjusted for inflation for tax
years beginning after 2000.)
- Certain related taxpayers.
- Certain dependents.
- Any 5% owner.
- Any individual who performs services involving certain
- 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 those wages subject
to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA
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.
Effect of work opportunity credit.
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.
Amount of credit.
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
Claiming the credit.
Use Form 8845 to claim this credit.
Effect on salary and wage deduction.
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 Indian employment credit.
Early termination of employee.
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