Indian Employment Credit (IEC): What It Was and How It Worked

What Was the Indian Employment Credit (IEC)?

The Indian employment credit (IEC) was a federal tax credit offered by the U.S. government to employers who hired enrolled members of Indian tribes or their spouses. Equal to 20% of qualified income and benefits, the IEC was designed to incentivize employers to hire Indigenous Americans. Authorized by Congress in 1993, the IEC was extended numerous times and expired on Dec. 31, 2021.

Understanding the Indian Employment Credit (IEC)

The Indian employment credit was available to employers who hired American Indians or their spouses who worked on and lived on or near a reservation—individuals who are part of a disadvantaged group. Employers were allowed to deduct 20% of qualified wages and qualified employee health insurance costs for every qualified employee they hired.

Some Indigenous American employees did not qualify the employer for the tax credit. These individuals included 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.

Partnerships, S corporations, cooperatives, estates, and trusts that paid or incurred qualified wages and/or qualified employee health insurance costs to/for a qualified Indigenous American employee during the tax year used Form 8845: Indian Employment Credit to claim the IEC. Others weren’t required to file the form if their only source for this credit was a partnership, S corporation, cooperative, estate, or trust. These entities could report the credit directly on Form 3800: General Business Credit.

As noted above, the IEC expired on Dec. 31, 2021. It was extended several times—the last time by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (part of the Consolidated Appropriations Act of 2021).

Special Considerations

If an employee was 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 (though if the disability ended during the first year of employment, the employee had to be offered re-employment).
  

Conditions of the Indian Employment Credit (IEC)

As with most tax credits, the IEC came with conditions about how employers could claim 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, the employee must have demonstrate the following for 20% of their wages to be taken as a credit:

• 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
  

Impact of the Indian Employment Credit (IEC)

Not much data is available about 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 IEC's benefits are self-evident if not immediately quantifiable. Encouraging employers to hire a historically disadvantaged population by providing an incentive seems like a positive.

All tax credits come at a cost. The Congressional Budget Office 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 through 2030, reaching $100 million in 2031 and $104 million in 2032.

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 increases an employer’s tax liability, something the Taxpayer Advocate points out “frustrates the original purpose of the credit.” This could discourage employers from hiring Indigenous Americans in the first place.

The Bottom Line

The IEC had been extended every year since it was first passed in 1993, but this ended with the 2021 tax year. While the credit is generally perceived to have been a positive for both employers and employees, it could have benefited from some tweaking, especially with regard to its mandatory nature. Employers should monitor information from the IRS regarding any changes, including on the IRS webpage that provides information about the IEC.