United States: California New Employment Credit Is Available To Qualified Employers

Due to the repeal of the Enterprise Zone ("EZ") Program, California has enacted the New Employment Credit ("NEC") that may be taken against corporate income / franchise tax and personal income tax.1 This credit may be claimed by qualified taxpayers for qualified employees hired on or after January 1, 2014, and for each taxable year until January 1, 2021. To qualify for the credit, a Tentative Credit Reservation ("TCR") from the California Franchise Tax Board ("FTB") is needed.2 A TCR, which may be requested online,3 equals 35 percent of the qualified wages paid for each qualified full-time employee hired, based on a net statewide increased number of full-time employees hired during the tax year over the base year.4 Essentially, a taxpayer could potentially be eligible for $56,000 or more of total credit per employee over a five-year period.5

Scope of Credit

Similar to the repealed California EZ credit, a qualified taxpayer is any employer engaged in a trade or business within a Designated Geographic Area ("DGA") that, during the taxable year, pays qualified wages to a qualified full-time employee and is not in an excluded business. DGAs have the highest unemployment and highest poverty in California.6

Excluded Businesses

Unlike the California EZ Program, businesses excluded from the NEC are those in temporary help services or retail trades, those primarily in food services, theatre companies and dinner theatres, alcoholic beverage drinking places, or casinos and casinohotels as defined in the North American Industry Classification System (NAICS) codes.7 However, these excluded businesses may qualify for the NEC if they meet the standards of a small business.8 All businesses characterized as "sexually oriented businesses," such as nightclubs or bars, are considered excluded businesses, regardless of the size of the business.9


A qualified individual for purposes of the NEC is an individual who meets all of the following:

  • Performs at least 50 percent of his or her services for the employer in the DGA;
  • Receives starting wages that are at least 150 percent 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 Section 515 of the Labor Code);10 and
  • Meets one of the five conditions discussed below.

Qualified wages for the NEC must exceed 150 percent of the minimum wage, but cannot exceed 350 percent of the minimum wage. If the qualified employee receives a salary, the hourly wage rate can be determined by dividing the annual salary by the hours of which the salary is based, which is normally 2,000 hours.11 Unlike the repealed EZ hiring credit, the NEC is not an addback of qualified wages.12 Once qualified for the NEC, an employee may continue to generate credits for 60 months from the original date of hire.13

In order for an individual to be qualified for the NEC, at least one of following five conditions must be met at the start of employment:

  • Unemployed for the six months immediately prior to hire. If the individual completed a college or similar program and received a baccalaureate, postgraduate, or professional degree, the completion date must be at least 12 months prior to hire. For purposes of this definition, an individual is unemployed for a period if all of the following circumstances apply:
    • Not receiving wages subject to withholding;
    • Not self-employed; and
    • Not a full-time student at a high school, college, university, or postsecondary education institution;
  • Veteran separated from the U.S. 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; or
  • Current recipient of CalWORKS or general assistance in accordance with the applicable sections of the Welfare and Institutions Code.14

Credit Usage and Carryforward

Only employees who are hired between January 1, 2014 and December 31, 2020 may be qualified employees for the NEC; each qualified employee generates a credit for up to 60 months starting with his or her hire date.15 A credit carryforward may be claimed for five additional years after the credit is generated.16 However, a credit may not be claimed on an amended tax return.17 There is no limit on the total available credit for a single employer, and this credit is not limited to tax on income attributable to a particular designated area. This credit is not refundable and the NEC cannot reduce tax below the tentative minimum tax.18

Under California Revenue and Taxation Code Section 23663, a credit or carryover earned by members of a combined reporting group may be assigned to an affiliated corporation that is a member of the same combined reporting group that meets the provisions of an eligible assignee.19

Other Considerations

A business must have a net increase in full-time employees in each taxable year, compared to the base year, in order to have an allowable credit.20 In addition, continued employment and wages for any employee for whom a TCR is received must be recertified. The annual recertification must be completed within 2½ months after the close of the taxable year.21


Just as the California EZ Program provided economic incentives for employers, the California NEC provides similar incentives designed to encourage employment of specific individuals in the state. Included as part of Governor Brown's economic development plan, the credit is designed to increase middle-class job creation in California.

The NEC uses a process that typically requires involvement of the Human Resource Department of a potentially eligible company, so procedures that will allow a benefit to be captured in the least intrusive manner will be beneficial for interested companies located in the designated zones. Though the NEC is more restrictive than California's previous EZ Program, excluding certain types of employers from eligibility outright, it should prove to be a lucrative credit for companies with the right locations and hiring needs.


1 CAL. REV. & TAX. CODE §§ 17053.73; 23626.

2CAL. REV. & TAX. CODE §§ 17053.73(e)(1); 23626(e)(1).

3 "New Employment Credit – Frequently Asked Questions, Tentative Credit Reservation" from https://www.ftb.ca.gov/online/New_Employment_Credit_Reservation/FAQs.shtml

4 CAL. REV. & TAX. CODE §§ 17053.73 (b)(3), (4); 23626(b)(3), (4).

5 The $56,000 credit for an employee would be obtained if such employee were paid $28 per hour and worked 2,000 hours a year for five years. In such case, the taxpayer would multiply 35 percent of all wages above $12 per hour (which would be 35 percent * $16 per hour or $5.60 per hour) by the total number of hours worked (which would be 2,000 * 5 years or 10,000). $5.60 per hour multiplied by 10,000 equals the $56,000 figure noted above.

6 CAL. REV. & TAX. CODE §§ 17053.73 (b)(7), (8); 23626(b)(7), (8).

7 CAL. REV. & TAX. CODE §§ 17053.73 (b)(11)(C); 23626(b)(11)(C).

8 CAL. REV. & TAX. CODE §§ 17053.73(b)(11)(D); 23626(b)(11)(D).

9 CAL. REV. & TAX. CODE §§ 17053.73(b)(14)(C)(i); 23626(b)(14)(C)(i).

10 CAL. REV. & TAX. CODE §§ 17053.73(b)(10)(A)(i) – (v); 23626(b)(10)(A)(i) – (v).

11 CAL. REV. & TAX. CODE §§ 17053.73(b)(6)(A), (b)(12)(A)(i); 23626(b)(6)(A), (b)(12)(A)(i).

12 "New Employment Credit – Frequently Asked Questions, Qualified Wages" from https://www.ftb.ca.gov/online/New_Employment_Credit_Reservation/FAQs.shtml

13 CAL. REV. & TAX. CODE §§ 17053.73(n)(3); 23626(m)(3).

14 CAL. REV. & TAX. CODE §§ 17053.73(b)(10)(A)(vi); 23626(b)(10)(A)(vi).

15 CAL. REV. & TAX. CODE §§ 17053.73(a)(1), (n)(3); 23626(a)(1), (m)(3).

16 CAL. REV. & TAX. CODE §§ 17053.73(k); 23626(j).

17 CAL. REV. & TAX. CODE §§ 17053.73(a)(4); 23626(a)(4).

18 New Employment Credit – Frequently Asked Questions, Credit usage and carryover" from https://www.ftb.ca.gov/online/New_Employment_Credit_Reservation/FAQs.shtml

19 Id.

20 CAL. REV. & TAX. CODE §§ 17053.73(b)(4); 23626(b)(4).

21 CAL. REV. & TAX. CODE §§ 17053.73(e)(3); 23626(e)(3).

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