Offset payroll tax with R&D credits

New or small businesses — including those with no gross receipts — may be eligible to apply for the R&D tax credit against their payroll tax.

How to reduce your payroll tax

You can potentially offset up to $250,000 annually until Dec. 31, 2022. After that the Inflation Reduction Act increased the election to $500,000 in R&D credits to use against your payroll tax each year, for up to five years.

The additional $250,000 would be used to offset the employer paid Medicare payroll tax of 1.45% each calendar quarter. The R&D payroll tax credit attributable to the employer paid Medicare tax must not exceed the tax imposed. Any unused R&D credits will be carried forward and applied to a succeeding calendar quarter as a credit.

Are you eligible?

Consider the following to help you determine if you’re eligible to apply the credit against your payroll tax.

Are you eligible to claim the R&D credit?

• Your activities MUST meet the tax definition of R&D
• Eligible expenses incurred by those activities can include wages, supplies, contract research, and computer leasing.

Are you eligible to apply the R&D tax credit against your payroll tax?

• You’ve generated gross receipts for five years or less.
• Your gross receipts are less than $5 million current year

Applying the credit

If you answered yes to the questions above, here’s the process to apply the R&D tax credit against your payroll tax:

Once the credit is applied to your payroll tax, it can only be applied to future payroll tax and not to your income tax.