California’s New Employee Tax Credit
In recent years, the business landscape of California has changed quite a bit. As of December 31, 2013, the state’s Enterprise Zone Program officially ended without a comprehensive replacement in place. To ensure that companies were offered some incentive to drive economic activity, many legislators were interested in developing replacement programs. As part of this effort, the state introduced the New Employee Tax Credit. Available to companies located in prior Enterprise Zones and other locations across the state, it provides generous incentives for hiring employees in economically disadvantaged areas. The goal is to ensure California companies hiring qualifying workers continue receiving a benefit from the state. It’s important to note that although the credit does offer a significant benefit, there are several criteria that must be met in order to qualify. To help prospects, clients and others learn more, JLK Rosenberger has provided a summary of the key points below.
About the Program
The tax credit is available to qualifying companies that hire full-time employees on or after January 1, 2014, and before January 1, 2021. It’s important to note the funds formerly used to support the now-defunct Enterprise Zone program will be partially directed to support this new incentive. Key information about the benefits include:
- Max Credit Amount: $56,000 per employee over a five year period (assuming an employee works 2,000 hours a year)
- Credit Amount: 35% per year
- Credit Determination – the credit amount is based on wages between $13.50/hour to $31.50/hour (however, only wages within this range are qualified, so the credit base may actually be very small)
In order to be considered a qualified employer there is specific list of criteria that must be met including:
- Businesses wishing to utilize this credit cannot be engaged in temporary help services, retail trades, and those primarily in food services, which excludes a significant number of employers that were previously eligible for the Enterprise Zone program.
- There is an exclusion for these otherwise disqualified businesses if they are considered a “small business,” meaning their gross receipts from the production of business income is less than $2 million.
- The employer must submit a Tentative Credit Reservation, for purposes of computing the credit, within 30 days of reporting the new hire to the EDD’s New Employee Registry.
- There must be a net increase in the total number of full-time employees working in California when compared to the base year (last year in which the tax credit was not received) based on full-time equivalent employees.
Additionally, the credit is only available for qualifying businesses located within a designated geographic area (DGA). DGA’s consist of the following:
- Regions that have the highest unemployment and highest poverty rates
- Former Enterprise Zones (excluding regions within the zones that have low unemployment and poverty levels)
- Former Local Agency Military Base Recovery Areas (LAMBRA)
Qualified employees must perform at least 50% of their services for their employer in the DGA. They must also receive starting wages that exceed 150% of the state minimum wage and work at least 35 hours. In addition, a qualified employee must meet one of the following five conditions, and be able to provide substantiating documentation to his/her employer:
- Unemployed for the six months immediately preceding hire
- Veteran separated from the armed forces in the preceding 12 months
- Recipient of the Earned Income Tax Credit in the previous taxable year
- Ex-offender convicted of a felony
- Current recipient of CalWORKS or general assistance in accordance with the applicable sections of the Welfare and Institutions Code of California
Determining whether your company qualifies now, or can in the future, is very tricky. There are many variables that need to be considered. However, companies currently doing business in or considering expanding into these areas should consider how this incentive can benefit their organization. For additional information on the New Employee Tax Credit and whether you qualify, contact JLK Rosenberger today! For additional information please contact us at (949) 860-9902, or click here to contact us. We look forward to speaking with you soon.