How Does the ERTC Interact With State-Level Tax Incentives? 

October 30, 2023
Dayes Law Firm

If you’re thinking about claiming the Employee Retention Tax Credit, make sure you understand how it will impact your state taxes before submitting your application. Every state approaches tax credits differently, and you may need to adjust how you file your state taxes accordingly. 

How does the Employee Retention Tax credit interact with state-level tax incentives? Dayes Law Firm is prepared to provide you with more information on this topic. 

The ERTC Impacts Your Wage Deductions

Claiming the ERTC may affect other aspects of your taxable income and deductions, both at the state and federal level. First, while businesses can typically deduct employee wages from their federally taxable income, you cannot deduct the wages equivalent to the ERTC credits you earned. 

For example, if you earned back $100,000 in refundable payroll credits through the ERTC, you’d need to subtract that $100,000 from your wage deductions for the year you claimed the credit. This means you may need to amend your income tax return for that year to adjust your payroll deduction. You may end up owing money because of this, but ideally, your ERTC will still exceed any money you owe. 

The ERTC Is Not Taxable Income at the Federal Level 

Thankfully, the IRS does not consider the ERTC to be taxable income. While you may need to claim these credits on your tax returns for the following year, you won’t need to pay income tax on them. 

Some States Allow for Deductions That the IRS Disallows 

Because every state’s tax laws are different, you should pay careful attention to the laws governing your state. Certain differences could significantly impact your taxes and deductions.

For instance, some states allow business owners to deduct wages that the IRS doesn’t allow them to deduct from federal taxes. The following states permit corporate taxpayers to deduct wages and healthcare expenses from their taxes that the IRS disallows:

  • California
  • Georgia
  • Maryland
  • Illinois
  • Texas
  • New York

Meanwhile, these states don’t allow corporate taxpayers to deduct wages equivalent to the ERTC:

  • New Jersey
  • Pennsylvania
  • Massachusetts

Claiming the ERTC and State Tax Incentives 

So, how does the Employee Retention Tax Credit intersect with state-level tax incentives? The answer depends on the state in which your business is located. 

Certain states don’t allow “double-dipping” when it comes to claiming employee incentives. Because of this, you wouldn’t be able to claim the Employee Retention Tax Credit and then claim an incentive for those same wages paid to employees. This rule applies to the Paycheck Protection Program (PPP) loan for business owners also claiming the ERTC; you can’t claim both for the same wages. 

However, you may be able to claim state tax incentives for wages that didn’t qualify for the ERTC. The ERTC only applies to full-time employees, and depending on your business size, you may only be able to claim wages paid to employees who weren’t working when operations were fully or partially suspended due to government orders. Other wages may qualify for other tax incentives. 

Because state tax laws can vary greatly, you’ll want to consult a tax professional before submitting any claims for the ERTC or state tax incentives. A tax attorney can help you maximize your credits without double-dipping, avoiding penalties. 

Consult ERTC Tax Professionals for Assistance 

The ERTC and state tax incentives can be confusing. If you’re wondering, “How does the Employee Retention Tax Credit intersect with state-level tax incentives?” we can help.

Our firm will review your employment records, help you determine your eligibility for the ERTC, and assist in determining your credits across federal and state tax incentives. Call Dayes Law Firm today at 866-567-4510 for a free consultation