How R&D Credits Help With Payroll Taxes [2024]

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Income tax time is quickly approaching, and it’s time for everyone to begin thinking of how they can minimize their tax liability. For most businesses, tax time is full of stress, endless paperwork, and long nights spent pouring over the IRS tax instructions.

Here at TaxRobot, we want to help make your life a little easier. We know how stressful tax time can be, and we have some great advice to offer. You may not be aware of this, but you can actually use your R&D credits to help with payroll taxes.

If this sounds too good to be true, hang in there because we’ll walk you through the process. We know businesses incur plenty of expenses, and we want to help ease your stress for 2024. Read on to learn how to minimize your payroll taxes with the help of your R&D credits.

Related: How Startups Benefit from the IRS Seed Stage

What Are R&D Credits?

R&D credits are dollar-for-dollar credits businesses, startups, or companies earn when conducting research and development (R&D) activities. Essentially, if you’re conducting activities with the intent of designing, developing, or improving products, technologies, software, processes, or techniques, then the expenses incurred during these activities could be eligible for R&D credits.

You can use these credits a few different ways, but using them to help with your payroll taxes is a great way to take some financial weight off your business’s shoulders. We’ll get into how you can use your R&D credits for this purpose later in this guide.

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What is Research and Development?

Research and development activities related to your business working on designing, developing, or improving products, technologies, software, processes, etc. You must pass the four-part test for your R&D expenses to qualify for the R&D tax credit.

Typically, anything your business has done to create a new or improved product or process

s considered research and development. It’s important to note that only scientific and technological activities can be claimed for the R&D tax credit.

You can’t claim marketing research and development expenses or similar activities. You also can’t claim expenses if you’re working on something that’s already been done before and patented unless you’re working on improving that product, process, software, etc.

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Which Expenses Qualify For R&D Tax Credit?

Not all expenses used to aid your research and development will qualify for the R&D tax credit. For example, you can’t claim the cost of a building or facility you bought to conduct the research and development. You also can’t claim the cost of benefits for your workers or overhead expenses.

Only three types of expenses qualify for the R&D tax credit. You can claim the cost of necessary supplies such as computers or scientific equipment, the wages or salaries paid to employees, and the money spent on research contracted out to a third party.

All of those expenses are considered Qualifying Research Expenses (QRE) and will qualify for the R&D tax credit.

Related: Understanding Convertible Debt

How Do I Claim R&D Tax Credit?

You’ll need to complete Form 6765 to claim the R&D tax credit. This form is also how you will use your R&D credit to help with payroll taxes. Form 6765 has four sections, and we’ll walk you through them briefly.

Sections A&B

Sections A and B are two different ways to calculate how much R&D tax credit you’re entitled to receive. Section A is the regular method, while Section B is the alternative simplified method.

You only need to fill out one of these sections, but it’s common practice for businesses to use both sections first to determine which calculation method will give them the most credit and then file using that section.

Section C

Section C is pretty simple in comparison with Sections A and B. In this section, you will be directed to fill out certain forms and schedules. Then, you’ll report the figure you arrived at in either Section A or B based on your particular business structure.

Are you looking for help using your R&D tax credits to help with payroll taxes in 2024? Contact us at TaxRobot to learn how we can help!

Section D

The final section of Form 6765 isn’t required. You don’t have to fill out this section if you choose not to, but this is how you can use your R&D credits to help with payroll taxes. Section D is where you communicate how you’d like your R&D credits to be used. We’re going to cover this in more detail in the next section.

Tax paperwork

How Do I Use R&D Credits For Payroll Taxes?

You can fill out Section D on Form 6765 to communicate you want to use your R&D credits to offset your payroll taxes. You will typically be able to use 10% of your R&D expenses to offset payroll taxes.

So, how does this work in practice? Well, say you incurred $500,000 of qualifying R&D expenses in a tax year. Once claimed, you can use $50,000 to offset your payroll taxes. 

This offset is available on a quarterly basis. So, if you file your taxes by June 30, 2022, you will likely see the benefits in the next quarter. The earliest filers could see a benefit in October when they file for the next quarter.

Related: Business Startup Costs & Tax Deductions

Does Every Company Qualify For Payroll Tax Offset?

Not every company will qualify for this. You will only qualify if you meet specific requirements. In order to qualify for the payroll tax offset, your company must:

  • Have gross receipts for five years or fewer
  • Have less than $5 million in gross receipts for the year the credit is elected to be used for payroll tax offset
  • Have payroll tax liability

If you meet those requirements, then you can use Form 6765 to use your R&D credits to offset your payroll taxes.

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If you want to lessen your business’s financial burden in 2024, you should consider using the R&D tax credit to offset your payroll taxes. It’s a great way to use your R&D credits and will help reduce your business’s payroll tax liability, which should take a significant financial burden off your business’s shoulders. 

Whether you need help with Form 6765 or any other aspect of your taxes, we can help! Contact us at TaxRobot to speak with an expert today!

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