Understanding California’s New Employment Credit

This credit replaces California’s New Jobs Credit and the former EZ and LAMBRA hiring credits.

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The New Employment Credit is available for each taxable year beginning on or after January 1, 2014, and before January 1, 2021, to qualified employers that have a net increase in full-time employees in California during the taxable year.

The New Employment Credit is applicable to businesses located in designated geographic areas (DGAs), which include:

• A former Enterprise Zone or LAMBRA (there is no provision for credits in Targeted Tax Areas or Manufacturing Enhancement Areas);
• A newly created Designated Census Tract; and
• Designated areas of high unemployment.

To determine whether a business is located within a DGA, go to http://maps.gis.ca.gov/gobiz/dga/default.aspx.

The following businesses are prohibited from claiming the New Employment Credit:

• Temporary employment agencies;
• Retail;
• Food services;
• Theater companies and dinner theaters;
• Bars;
• Casinos or casino hotels; and
• Adult live entertainment businesses.

Note: Businesses other than adult live entertainment businesses may still qualify if they are considered a “small business.” A small business is a trade or business that has aggregate gross receipts, less returns and allowances reportable to California, of less than $2 million during the previous taxable year as determined under R&TC §25120(a) and (d).

The credit

The credit is equal to 35% of the qualified wages for the first 60 months of employment, and the law specifies that:

• The credit must be claimed on an original, timely filed return;
• The employer must make a tentative credit reservation with the FTB within 30 days of the date the EDD’s new-hire reporting requirements are met;
• Unused credits may be carried forward for four years;
• Employers must annually certify continued employment and wages; and
• The employee is a qualified full-time employee.

Note: Unlike the former EZ and LAMBRA credits, this credit may be used against income that is not sourced from the DGA.

Who is a qualified full-time employee?

A qualified full-time employee is an individual who meets all of the following:

• Performs at least 50% of his or her services for the employer in the DGA;
• Receives starting wages that are at least 150% of the state minimum wage;
• Is hired on or after January 1, 2014;
• Is hired after the DGA is designated;
• Is paid hourly wages for an average of at least 35 hours per week, or is salaried, and paid for full-time employment (within the meaning of Labor Code §515); and
• Is one of the following:
  • Six-month unemployed workers;
  • Veterans discharged within 12 months prior to hire;
  • Persons receiving the Earned Income Tax Credit;
  • Ex-felons; or
  • Recipients of CalWORKs or general assistance.

Qualified wages

Qualified wages are that portion of wages paid or incurred that exceeds 150% of minimum wage but does not exceed 350% of minimum wage.

Reserving the credit

To qualify an employee for purposes of computing the credit, the employer must request a tentative credit reservation (TCR) from the FTB. The application is completed online, and the employer receives immediate confirmation.

The TCR must be requested within 30 days of completing the EDD New Hire Reporting Requirements.

To request the TCR, go to www.ftb.ca.gov/online/New_Employment_Credit_Reservation/New_Employment_Credit_Reservation.asp.

Calculating the credit

Computing the credit involves three steps:

1. Compute the tentative credit amount: The credit amount is qualified wages times 35% (the applicable credit percentage).
2. Compute the applicable percentage: To claim a credit, the employer must have a net increase in full-time employees working in California. This is measured by comparing the full-time employees working in California during the taxable year to the prior year, both determined on an annual full-time employee equivalent basis.
   Net increase in full-time employees ÷ Number of qualified full-time employees
   The applicable percentage can never be more than 100%.
3. Multiply the tentative credit amount by the applicable percentage.

 

If you have any questions about the New Employment Credit, give Bressler & Company a call at 559.924.1225.  We deal with these credits on a daily basis.