Just like the federal EITC functions like a self-employment tax credit, so does a state EITC. Very few state (or for that matter, federal) policy makers realize that “earned income” for the purposes of the state or federal Earned Income Tax Credit includes not only wage income but also self-employment net profit. This means that a state EITC can be a powerful tool for identifying and supporting new entrepreneurs during their critical start-up and lower income years.
For the self-employed business, the tax preparation process and the EITC refund from business profits can provide an annual opportunity to analyze the new business’s success, make appropriate business investments from the lumpsum refund, and decide how much of the business profits should be returned to household needs. A state EITC policy which recognizes the educational power of first-time business tax preparation can serve two public policies at once – helping low-income families save and advancing new business development.