Indian Employment Credit (IEC)

What Is the Indian Employment Credit (IEC)?

The Indian employment credit (IEC) was a federal tax credit offered by the United States government to employers who hired enrolled members of Indian tribes or their spouses. The credit—equal to 20% of qualified income and benefits—was designed to create an incentive for employers to hire Indigenous Americans, a historically disadvantaged group.

First authorized by Congress in 1993, the IEC had been extended numerous times, most recently by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (part of the Consolidated Appropriations Act of 2021). It expired on Dec. 31, 2021.

Understanding the IEC

The IEC was available to employers who hired American Indians or their spouses who work on a reservation and live on or near a reservation. Employers were allowed to deduct 20% of qualified wages and qualified employee health insurance costs for every qualified employee they hired.

The term “qualified wages” generally refers to wages paid or incurred by an employer to a qualified employee except for wages that qualify for the work opportunity tax credit (WOTC) (reported on Form 5884). Qualified health insurance costs are those paid or incurred by an employer for a qualified employee.

Some Indigenous American employees did not qualify the employer for the tax credit, including those whose wages from the company did not meet a certain threshold specified by the Internal Revenue Service (IRS), those who were 5% owners of the company, and those whose work was related to certain gaming activities.

Stipulations of the IEC

As with most tax credits, the IEC came with stipulations about what was and what was not permitted when it came to claiming the credit. For example, although the tax credit, per employee, consisted of total wages and health benefits, any amount paid for health insurance related to a salary reduction arrangement was not to be considered.

The total amount of wages and health insurance costs per employee subject to the 20% tax credit was $20,000. Moreover, credit wasn’t permitted for any employee who earned more than $30,000 (adjusted for inflation since 1994) in the tax year.

In addition, in order for 20% of an employee’s wages to be taken as a credit, the employee must have:

• Earned more than 50% of their annual wages in a trade or business of the employer
• Not been a 5% owner in the business of the employer
  
• Not performed services for the employer in class I, II, or III gaming
  

Early Termination of an Employee

If an employee is terminated less than one year after the date of employment, the following applied:

• The IEC credit was not permitted to be taken for the tax year of termination.
• Credits allowed for prior tax years had to be recaptured.
• Any carryback or carryover of the credit had to be adjusted.

The rules above didn't apply if any one of the following occurred:

• The employee voluntarily quit.
• The employee was terminated for cause.
• The employee became disabled. ⁺

^{+If the disability ends, the employee must be offered re-employment.}

Reporting the IEC

Employers generally used Form 8845 to claim the IEC if they paid or incurred qualified wages and/or qualified employee health insurance costs to/for a qualified Indigenous American employee during the tax year.

Partnerships, S corporations, cooperatives, estates, and trusts were required to file this form to claim the credit. All others weren’t required to complete or file this form if their only source for this credit was a partnership, S corporation, cooperative, estate, or trust. Instead, they could report the credit directly on Form 3800, General Business Credit.

Impact of the IEC

Not much data is available regarding the impact of the IEC other than general supportive statements such as this one from the tax preparation firm AndreTaxCo LLC: “The Indian Employment Credit is a federal tax credit designed to encourage employers to hire and retain Native Americans who live on or near an Indian reservation. The credit creates economic opportunities and quality jobs for Native Americans and their families while providing employers with vital tax benefits to stimulate immediate growth and growth in future years.”

It could be argued that the benefits of the IEC are self-evident if not immediately quantifiable. Encouraging employers to hire a historically disadvantaged population by providing an incentive for doing so seems like a positive.

Of course, all tax credits cost something. In the case of the IEC, the Congressional Budget Office (CBO) has estimated that the cost in lost tax revenue of retroactively reinstating the IEC for tax years 2022 and 2023 would be $138 million. After that, the cost would be under $100 million per year.

In 2018 the IRS Taxpayer Advocate’s office brought to light two potentially harmful stipulations of the IEC as written in the U.S. Internal Revenue Code (IRC).

• “IRC 280C prohibits a deduction for the portion of wages and salaries paid in the taxable year which is equal to the sum of credits determined under 45A. This provision prevents the employer from benefitting from the Indian Employment Credit and another deduction on the same costs.”
• “IRC 38(c) sets a cap on general business credits, which includes IRC 45A.”

IRC 280C and 38(c) effectively make taking the IEC mandatory, even if it results in an increase in the employer’s tax liability, something the Taxpayer Advocate points out “frustrates the original purpose of the credit.” This could, in fact, discourage employers from hiring Indigenous Americans in the first place.

The Bottom Line

Although the IEC had been extended every year since it was first passed in 1993, there is no guarantee it will be extended at the end of any authorization, including for the 2022 tax year. While the credit is generally perceived to be a positive for both employers and employees, it might benefit from some tweaking, especially with regard to the mandatory nature of the tax credit.

Employers, especially those who have been able to take this tax credit in the past and wish to continue doing so, should closely monitor information from the IRS regarding any changes, including on the IRS webpage that provides information about the IEC.