What Is Form 8974 for the R&D Payroll Tax Credit?
Form 8974 is the essential step for applying a calculated R&D credit to reduce an employer's quarterly social security tax liability.
IRS Form 8974, the Qualified Small Business Payroll Tax Credit for Increasing Research Activities, is the designated document for applying a previously calculated research credit against the employer’s share of Social Security and Medicare taxes. This form does not determine the credit amount but is the mechanism through which an eligible business claims the credit on its quarterly payroll tax return. The form acts as a bridge, connecting the income tax-based research credit to a business’s payroll tax obligations. It is filed alongside an employer’s standard quarterly payroll tax return, such as Form 941, Employer’s QUARTERLY Federal Tax Return.
Determining Eligibility to File
To use Form 8974, a business must first meet the definition of a Qualified Small Business (QSB). This involves satisfying two distinct tests. The first is a gross receipts test, which requires the business to have less than $5 million in gross receipts for the tax year the credit is being claimed. The second is a business history test, stipulating that the company must not have had gross receipts for any tax year preceding the five-tax-year period that ends with the current credit year.
A business must also have a research credit to claim. This credit is calculated on Form 6765, Credit for Increasing Research Activities, which is filed with the business’s annual income tax return. On Form 6765, the business makes the formal election to take a portion of its research credit, up to $500,000 annually, as a payroll tax credit. The credit can only be claimed on payroll tax returns for quarters that begin after the income tax return with the election is filed.
Information Required to Complete Form 8974
To fill out Form 8974, a business must gather its name, address, and Employer Identification Number (EIN), which must match IRS records precisely. The filer must also identify the calendar quarter and year for which the credit is being claimed. This aligns the Form 8974 with a specific quarterly payroll tax return, such as Form 941.
The primary document needed is the completed Form 6765 for the relevant tax year. The business will need the total credit amount elected for the payroll tax offset from that form. This figure is the starting point for the calculation on Form 8974. If the business has claimed this credit in a previous quarter, it will also need the amount of any credit carried forward from the prior quarter’s Form 8974.
Completing and Filing Form 8974
The top of the form requires the business’s identifying information and the specific calendar quarter. The core of the form involves a few lines where the filer enters the credit amount from Form 6765, adds any carryforward from a prior quarter, and then calculates the credit for the current quarter.
Form 8974 is not filed by itself. It must be attached to the business’s corresponding employment tax return for the quarter, such as Form 941, Employer’s QUARTERLY Federal Tax Return. The credit amount calculated on Form 8974 is then transferred to Line 11 of Form 941. This action directly reduces the total tax liability reported on Form 941.
The Inflation Reduction Act of 2022 increased the maximum research credit that a Qualified Small Business can elect to apply against payroll taxes to $500,000 per year. The credit is now applied first against the employer’s share of Social Security tax (for up to $250,000 of the credit). Any remaining credit (up to an additional $250,000) can then be applied against the employer’s share of Medicare tax. Any portion of the credit that exceeds the applicable payroll tax liabilities for the quarter can be carried forward to subsequent quarters of the same tax year.