As an employer, you are expected to pay a range of payroll and income taxes. Through employer tax credits, you can effectively reduce your tax bill and save money. Depending on where you are located, the Empowerment Zone Employment Credit can save you up to $3,000 per eligible worker.
What Is an Empowerment Zone?
An empowerment zone (EZ) is an economically distressed area that has been designated by the government for extra aid and support. There are 30 empowerment zones that are located in urban areas and 10 located in rural areas. Different grants and federal incentives are available for businesses in these areas.
Under the Omnibus Budget Reconciliation Act of 1993, the United States government officially set up empowerment zones. According to the legislation, a community has to demonstrate economic distress to be considered an empowerment zone. Typically, empowerment zones have high unemployment rates, business divestment, a poverty rate of at least 20%, and a decreasing population.
Ultimately, these grants and incentives are designed to spur economic growth and decrease unemployment. The Empowerment Zone Employment Credit is one example of these incentives, but there are other credits and incentives out there. Other than the Empowerment Zone Employment Credit, the following incentives are also available.
- Section 179 deductions
- Work Opportunity Tax Credits
- Avoiding gains on rollovers
- Qualified Zone Academy Bonds (QZABs)
- EZ facility bonds
How Do You Find Out Where Empowerment Zones Are Located?
You can find the location of empowerment zones using a locator tool from the United States Department of Labor (DOL). The United States Department of Housing and Urban Development (HUD) also maintains an ArcGIS map of census tracts that are in empowerment zones.
How Does an Empowerment Zone Employment Credit Work?
With the EZ Employment Credit, employers can claim a credit worth 20% of the first $15,000 in wages paid to a worker in an empowerment zone. This credit can offset up to 25% of your alternative minimum tax liability. The Work Opportunity Tax Credit (WOTC) also specifically provides a credit for hiring employees who live in empowerment zones.
To obtain the Empowerment Zone Employment Credit, you must fill out Form 8844. Then, this form is submitted with your annual tax return.
These credits are available to full-time and part-time workers. However, owners and relatives aren’t eligible for this credit.
Are Empowerment Zones Still Active?
Empowerment zones are still active and are expected to remain active in the near future. Currently, empowerment zones have been extended to at least December 31, 2025.
What Is the Empowerment Zone Employment Credit Limit?
The EZ Employment Credit limit is 20% of the first $15,000 in wages that an employee makes. This means that the Empowerment Zone Employment Credit tops out at $3,000.
This credit is nonrefundable, so you can’t get your money back directly. However, you can carry the credit back one year or forward by 20 years.
Determine If You Are a Part of an Employment Zone
Depending on your location, you may be able to use an Empowerment Zone Employment Credit to save money on your company’s tax bill. The hardest part is navigating the initial administrative burden associated with figuring out employee locations, where the EZ is, and how to calculate applicable wages. Later on, you can use this information to file Form 8844 with your EZ credit.
If you want to simplify the process, an HR and payroll provider can help you track employee wages and access other employer tax credits. To find out more information about EZ credits, reach out to our small business HR and payroll experts today.