Does Hawaii Tax ERC Federal Credit?

Key Takeaways

• The Employee Retention Credit (ERC) is a refundable tax credit designed to help businesses retain employees during the COVID-19 pandemic.
• Businesses in Hawaii are eligible for ERC if they meet specific criteria, including experiencing a significant decline in gross receipts or being subject to a government shutdown order.
• Hawaii does not tax the ERC at the state level, aligning with federal tax treatment.

 

ERC Basics

 

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a refundable tax credit introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. Its primary goal was to help businesses keep their employees on payroll during the economic downturn caused by the COVID-19 pandemic.

 

Essentially, the ERC provided a financial incentive for employers to retain their workforce, even if their operations were partially or fully suspended due to government orders. The credit applies to qualified wages paid to employees during specific periods in 2020 and 2021.

 

Eligibility Criteria

To qualify for the ERC, businesses must meet certain criteria. Here are the key requirements:

 

• The business must have been partially or fully suspended due to a government order related to COVID-19.
• Alternatively, the business must have experienced a significant decline in gross receipts. For 2020, this means a decline of more than 50% compared to the same quarter in 2019. For 2021, the threshold is a decline of more than 20%.
• Qualified wages include wages and compensation paid to employees during the eligible periods. For businesses with 100 or fewer full-time employees, all employee wages qualify. For larger businesses, only wages paid to employees who were not providing services due to suspension or decline in business qualify.

 

Here’s the differences between the 2020 and 2021 ERC claims (image courtesy of financestrategists.com).

 

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Does Hawaii Tax ERC Federal Credit?

 

Federal Tax Treatment of ERC

The ERC is a refundable tax credit against certain employment taxes, designed to help businesses retain employees during the COVID-19 pandemic. At the federal level, the IRS has clarified that the ERC is not considered taxable income. However, the wages paid that qualify for the ERC cannot be deducted as a business expense for federal income tax purposes.

 

This means while you get the benefit of the credit, you lose the ability to deduct the same wages, which could potentially increase your taxable income. It’s a trade-off, but the immediate cash flow benefit of the ERC often outweighs the loss of the wage deduction.

 

Hawaii State Tax Laws

Hawaii does not tax the ERC income. 

 

The ERC is considered a federal payroll tax credit, and while it is treated as tax-exempt income at the federal level, it is subject to expense disallowance rules. 

 

This means that businesses must reduce their wage deductions by the amount of the credit received when filing their federal income tax returns.

 

Impact on Businesses in Hawaii

The alignment of Hawaii’s tax treatment with federal guidelines provides a level of predictability for businesses. Since the ERC is not taxed at the state level, businesses can fully benefit from the credit without worrying about additional state tax liabilities.

 

Steps to Ensure Compliance

To ensure compliance with both federal and Hawaii state tax laws, follow these steps:

 

• Keep detailed records: Maintain thorough documentation of wages paid and the calculation of the ERC. This includes payroll records, government orders related to COVID-19, and gross receipts comparisons.
• Separate wage expenses: Clearly segregate the wages used to claim the ERC from other business expenses. This will help in accurately preparing your tax returns and avoiding any double-dipping issues.
• Consult with a tax professional: Given the complexities of the ERC and its interaction with other relief programs like PPP, it’s wise to seek advice from a tax professional. They can help you understand the rules and maximize your benefits.
• File amended returns if necessary: If you’ve already filed your tax returns and later determine you qualify for the ERC, you may need to file amended returns. Ensure these amendments are consistent across both federal and state filings.

 

Choose ERTC Express for Your ERC Filing

At ERTC Express, we have the expertise and dedication to help businesses maximize their credits while staying compliant. Our team of CPAs is well-versed in the latest IRS guidelines and can provide personalized assistance to ensure you get the most out of your ERC claim.

 

Here are some of the key services offered by us:

 

• Comprehensive ERC evaluation: Assess your eligibility and calculate your potential credit accurately.
• Documentation support: Help you gather and organize the necessary records to substantiate your claim.
• Amended return filing: Assist in preparing and filing amended returns if you’ve already filed your taxes.
• Ongoing compliance assistance: Provide guidance to ensure you remain compliant with all tax laws and regulations.

 

Client success stories highlight our effectiveness in helping businesses handle the ERC process. For instance, a retail company in Georgia qualified for $773,000 in total ERC credits with our help in just over six weeks. 

 

Getting started with ERTC Express is simple. Visit our website, fill out a brief questionnaire, and a dedicated CPA will get in touch with you to begin the evaluation process.

 

With our “Power of 3” approach, three CPAs carefully review each claim, ensuring precision and helping businesses secure refunds that are frequently 40-120% higher than those processed by larger payroll or software firms.

 

Contact ERTC Express

 

Frequently Asked Questions (FAQ)

 

What is the Employee Retention Credit (ERC)?

The ERC is a refundable tax credit introduced by the CARES Act in 2020 to help businesses retain employees during the COVID-19 pandemic. It provides financial incentives for employers to keep their workforce on payroll during periods of economic hardship.

 

How do I know if my business qualifies for the ERC?

To qualify for the ERC, your business must have been partially or fully suspended due to a government order related to COVID-19, or you must have experienced a significant decline in gross receipts. ERTC Express can help you assess your eligibility and calculate your potential credit.

 

Can I claim both the ERC and PPP loans?

Yes, businesses can claim both the ERC and PPP loans, provided they do not use the same wages for both credits. Careful planning and documentation are necessary to maximize the benefits from both programs.

 

Is the ERC taxable at the state level in Hawaii?

No, Hawaii aligns with federal guidelines and does not tax the ERC at the state level. However, you cannot deduct the wages used to claim the ERC on your Hawaii state tax return.

 

What makes ERTC Express unique?

ERTC Express stands out due to our specialized expertise in ERC claims, a rigorous verification process involving multiple CPA teams, and a commitment to client success with no upfront costs. Clients are only billed once they receive their funds.