What Are the ERTC Benefits for Companies in High-Tax States? 

January 12, 2024
Dayes Law Firm

When the federal government passed the CARES (Coronavirus Aid, Relief, and Economic Security) Act and the Employee Retention Tax Credit (ERTC), millions of businesses were given a financial lifeline that allowed them to stay afloat and keep employees on the payroll, despite massive economic disruptions. 

As a reminder, the ERTC allows businesses to claim up to $26,000 per employee for qualifying wages during 2020 and 2021. Further, the ERTC is a tax refund, not a loan. That means it doesn’t have to be paid back, nor does it count as taxable income. 

However, because the refund credits taxable wages, claiming the refund could offset tax deductions and potentially increase a company’s tax burden. Here is more about the ERTC benefits that businesses in high-tax states can realize when they file an ERTC claim. 

How High-Tax States Affect ERTC and Taxes 

Even though ERTC is not classified as taxable income, claiming the refund can affect which payroll deductions you can claim on that year’s taxes. In other words, businesses that receive the ERTC will have to offset their payroll expense deduction by the amount of the credit. 

From a financial standpoint, for companies in high-tax states with high employment taxes, the ERTC could provide an opportunity to offset payroll-related costs. Whether this is possible depends on the state in which your company is headquartered. 

The exact tax implications for ERTC funds will vary by state. Some states may allow additional deductions that other states do not. These states include: 

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

Notably, New York, Maryland, and California have some of the highest tax rates in the nation, so this can be a significant tax advantage if payroll costs make up a significant portion of your company’s expenses. 

How Claiming ERTC Funds Can Affect Your Taxes

As you know, employee wages are deductible expenses. However, any ERTC credits you claim based on qualified wages generally cannot be deducted. It’s important to be aware of this because it can increase the size of the check you write to Uncle Sam. Again, the rules regarding ERTC Incentives vary by state, so the example below may not be universal. 

Here’s how it generally works: 

Let’s say you claimed $100,000 in ERTC credits for a tax year. When you file taxes, that $100,000 would be excluded from your wage deductions for purposes of determining your taxable business expenses. From a practical standpoint, you would have to amend that year’s tax return to be compliant with IRS guidelines. 

The net effect is that you may end up owing some money, but the funds you receive from your ERTC claim should substantially exceed the tax bill increase. This is one of the most powerful advantages of ERTC tax credit, even if you ultimately face a higher tax burden for the year. 

Note that this tax burden is only applicable at the state level. At the federal level, the ERTC does not count as taxable income. It’s also important to note that ERTC refunds are taxed for the year in which the credit was generated. For example, if you file an ERTC claim for 2021 wages, the tax implication is based on the 2021 fiscal year, regardless of when you actually receive the refund. 

Contact Dayes Law Firm for Details About Tax Savings With ERTC and Other ERTC Advantages 

There are numerous Employee Retention Tax Credit pros, and an experienced tax professional can help ensure you take advantage of all the benefits of ERTC program perks with minimal tax consequences. 

Dayes Law Firm has helped hundreds of businesses file for more than $250 million in ERTC funds since the inception of the program. Contact us at 800.503.2000 to schedule a free consultation.