Clarification of Procedures for an Employer To Claim the Qualified Small Business Payroll Tax Credit for Increasing Research Activities on Form 943 or Form 944

Employers who report their payroll taxes on an annual basis (Forms 943 and 944) may need to adjust the amount reported on Form 8974, line 11, because the qualified small business payroll tax credit for increasing research activities can’t be claimed until the first calendar quarter that begins after the date on which you file your income tax return that makes the election to take the credit against payroll taxes. The amount reported on Form 8974, line 10, is the total amount of social security tax (both employer and employee share) for the whole year, but you can only apply the credit against the employer share of social security tax paid in calendar quarters that began after the date on which you filed your income tax return making the election. You can’t apply the credit against the employer share of social security tax paid in any calendar quarter that began before the date on which you filed your income tax return making the election. You may therefore need to adjust the amount you report on Form 8974, line 11, to be 50% of the total social security tax that you paid in the quarters after the income tax return making the election was filed. However, as discussed later, any unused credit being carried forward from a prior calendar year is available to be applied against the employer share of social security tax beginning with the first calendar quarter of the current year.

When filing Form 943 or Form 944 and claiming the payroll tax credit, you will need to adjust the amount you report on line 11 if it is the first year claiming the credit, or a subsequent year claiming the credit and the income tax return electing the credit was filed on any date in the first three quarters of the calendar year (that is, January 1–September 30). In contrast, if you made the election on an income tax return filed in the fourth quarter of the year (October 1–December 31), you can't claim the credit until the first quarter of the subsequent year on your employment tax return for that subsequent year, and you won’t need to make the adjustment for line 11 described in these instructions on your Form 8974 for that subsequent year because the credit can be applied against the employer social security tax paid in all four quarters of that subsequent year. The instructions below explain the adjustment in two situations: (1) you're claiming the credit, but you don’t have a credit carryforward from a prior year; and (2) you’re claiming the credit in a subsequent year based on an election in that subsequent year with a credit carryforward from a prior year.

First Year Claiming the Credit or Subsequent Year Claiming the Credit but Without a Credit Carryforward From a Prior Year

Steps To Determine the Amount To Report on Form 8974, line 11

  1. Determine the amount of social security tax reported on Form 8974, line 10, attributable to each quarter of the year that is reported in the calendar year box at the top of Form 8974 and enter these amounts in column (b). Multiply each quarter’s social security tax by 50% (0.50) and enter the amounts in column (c).
    (a) Quarter (b) Social Security Tax (c) Multiply column (b) by 50% (0.50) (d) Amount from column (c) to include on Form 8974, line 11
    First (Jan. 1-Mar. 31)      
    Second (Apr. 1-Sept. 30)      
    Third (July 1-Sept. 30)      
    Fourth (Oct. 1 - Dec. 31)      
    Total      
  2. Determine when the election was made (that is, the date that you filed your income tax return as reported on Form 8974, Part 1, column (c)).
  3. Enter in column (d) the amounts from column (c) for the quarters that began after the date determined above in Step 2. Enter the total of the amounts in column (d) on Form 8974, line 11.

Form 943 example (first year claiming the credit).  You filed your 2017 income tax return based on a calendar year (January 1–December 31) on April 17, 2018. You elected to take a $100,000 payroll tax credit for increasing research activities on the Form 6765 that you filed with your 2017 income tax return. You will claim the payroll tax credit on your 2018 Form 943 that you file in January 2019. In January 2019, you prepare your 2018 Form 943 and Form 8974 to take the payroll credit. The amount you figured on Form 8974, line 10, for total social security tax paid in 2018 is $80,000. Following Step 1 above, you determine the following social security tax breakdown by quarter.

(a) Quarter (b) Social Security Tax (c) Multiply column (b) by 50% (0.50) (d) Amount from column (c) to include on Form 8974, line 11
First (Jan. 1-Mar. 31) $12,000 $6,000  
Second (Apr. 1-Sept. 30) $18,000 $9,000  
Third (July 1-Sept. 30) $25,000 $12,500 $12,500
Fourth (Oct. 1 - Dec. 31) $25,000 $12,500 $12,500
Total $80,000 $40,000 $25,000

For purposes of Step 2, your income tax return was filed on April 17, 2018. In Step 3, you enter in column (d) the amounts from column (c) for the quarters that began after April 17: $12,500 for the third quarter and $12,500 for the fourth quarter. You enter the total, $25,000, on Form 8974, line 11. In this example, you will also have a $75,000 carryforward to your 2019 Form 943.

Subsequent Year Claiming the Credit With a Credit Carryforward From a Prior Year

Determine if you’re carrying forward any remaining credit from a prior year. If this is the first year that you’re claiming the credit, you don’t have any carryforward. If this isn’t the first year that you’re claiming the credit, the amount of carryforward remaining is reported on Form 8974, Part 1, column (g). However, don’t count any amount from a new election as a carryforward from a prior year. The amount carried forward from the prior calendar year is available to use against the employer share of social security tax paid in the first calendar quarter of the current year and subsequent quarters, since the first calendar quarter began after the date on which you filed your income tax return for the prior year. However, the amounts claimed in the current calendar year for an election made on an income tax return filed in the current year may only be used against the employer share of social security tax paid in calendar quarters that began after the date on which you filed your income tax return as explained earlier.

Steps To Determine the Amount To Report on Form 8974, line 11

  1. Determine the amount of social security tax reported on Form 8974, line 10, attributable to each quarter of the year that is reported in the calendar year box at the top of Form 8974 and enter these amounts in column (b). Multiply each quarter’s social security tax by 50% (0.50) and enter the amounts in column (c).
    (a) Quarter (b) Social Security Tax (c) Multiply column (b) by 50% (0.50) (d) Amount from column (c) to include on Form 8974, line 11
    First (Jan. 1-Mar. 31)      
    Second (Apr. 1-Sept. 30)      
    Third (July 1-Sept. 30)      
    Fourth (Oct. 1 - Dec. 31)      
    Total      
  2. Add the amounts in column (c) until you reach the amount of the credit carried forward from the prior year and enter these amounts in column (d). For this step, don’t include in column (d) more than the amount of the credit that you carried forward.
  3. For the credit claimed in the current year, determine when the election was made (that is, the date that you filed your income tax return as reported on Form 8974, Part 1, column (c)).
  4. For the quarters that began after the date determined above in Step 3, enter in column (d) any amounts in column (c) not previously used. Enter the total from column (d) on Form 8974, line 11. Note. If the amounts you figured in Step 2 carry forward into the same quarter as the amounts you figure in Step 4, you should include both amounts in that quarter’s total in column (d).

Form 943 example (subsequent year claiming the credit with a credit carryforward from a prior year). Continuing with the example above, you filed your 2018 income tax return based on a calendar year (January 1–December 31) on April 15, 2019. You elected to take a $200,000 payroll tax credit for increasing research activities on the Form 6765 that you filed with your 2018 income tax return. You will claim the payroll tax credit on your 2019 Form 943 that you file in January 2020. In January 2020, you prepare your 2019 Form 943 and Form 8974 to take the payroll credit. The amount on Form 8974, line 7, is $275,000 ($75,000 carried forward from 2018, and $200,000 for 2019). The amount you figured on Form 8974, line 10, for total social security tax paid in 2019 is $400,000.

Following Step 1 above, you determine the following breakdown by quarter and enter the amounts in columns (b) and (c).

(a) Quarter (b) Social Security Tax (c) Multiply column (b) by 50% (0.50) (d) Amount from column (c) to include on Form 8974, line 11
First (Jan. 1-Mar. 31) $80,000 $40,000 $40,000
Second (Apr. 1-Sept. 30) $90,000 $45,000 $35,000
Third (July 1-Sept. 30) $100,000 $50,000 $50,000
Fourth (Oct. 1 - Dec. 31) $130,000 $65,000 $65,000
Total $400,000 $200,000 $190,000

Following Step 2, you add the amounts in column (c) until you reach the amount of the credit carried forward from the prior year ($75,000 ($40,000 and $35,000)) and you enter these amounts in column (d). Your carryforward credit of $75,000 is now completely used up.  For purposes of Step 3, your income tax return was filed on April 15, 2019. In Step 4, for the quarters that began after the date determined above in Step 3 (third and fourth quarter), enter in column (d) any amounts in column (c) not previously used ($50,000 and $65,000). Enter the total from column (d), $190,000, on Form 8974, line 11.  Your total payroll tax credit for 2019 is $190,000 ($75,000 carried forward from your 2018 Form 8974 and $115,000 from your 2019 Form 8974). Your credit carryforward to 2020 is $85,000.