What's the Federal R&D Payroll Tax Offset - Program Overview | CTI (2024)

R&D payroll tax offset defined

The federal R&D payroll tax offset provision of the R&D Tax Credit allows a startup company to claim credit against their payroll taxes. The effective date is for tax years beginning after December 31, 2015. Under IRC Section 41(h), a “qualified small business” (QSB), can elect to use their federal R&D credit to offset their employer-paid payroll taxes starting in tax years after December 31, 2015.

How much businesses can save

Using the federal R&D payroll tax offset provision, a startup company can claim a credit against their employer-paid payroll taxes of up to $500,000 for a single year. Over five years, there is a maximum available tax savings of $2,500,000.

Additional details

A qualified small business is defined as a business with less than $5 million in gross receipts in the credit year and has no “gross receipts” for any taxable year preceding the 5-taxable-year period ending with the credit year.

The payroll tax is the portion of the employer-paid social security tax of FICA (6.2%), also called Old-Age, Survivors, and Disability Insurance (OASDI). In 2017, the limit on the social security portion of the tax was capped at $127,200 of an employee’s annual earnings. The credit cannot be used to reduce Medicare taxes.

When to claim the credit

Taxpayers must claim the federal R&D Tax Credit on the income tax return and then can use all or a portion of the credits in the following quarter(s) to offset payroll taxes. Any unused credits can be carried forward to the next year.

How to claim the credit

• Complete Form 6765 “Credit for Increasing Research Activities” on the income tax return.
• In Section D, elect the payroll tax credit option and indicate the amount of payroll tax offset.
• Upon the timely filing of your income tax return (including any extension), in the next calendar quarter, you can start to reduce your payroll tax payment by the credit amount when you file Form 941 “Employer’s Quarterly Federal Tax Return”.