There can be timing issues related to claiming the payroll tax research credit. Once a qualified small business taxpayer makes the election to apply a portion of R&D credits against the employer portion of Social Security tax, they can use the credit on their Employer Federal Tax Return (Form 941, 943 or 944).
The question is when do you apply the payroll tax research credit to your payroll tax deposits?
According to the memo issued by the IRS Office Chief of Counsel, an employer can take the payroll tax credit that was calculated on Form 6765 starting with the first payroll payment of the first quarter after you have filed the election on Form 6765 with your federal tax return. You can apply the credit up to the amount of employer Social Security tax on the wages calculated for the first payroll tax payment. For any unused credit, you will continue to apply it to each succeeding quarter until the entire credit has been used.
For those employers that use Schedule B on your Form 941 to report your tax liabilities, you will need to take into account the tax credit on the form. In other words, you must reduce the first liability by the credit to the extent of the employer Social Security tax and carry the excess credit to each succeeding liability until there is no more credit. This will allow the total liability from Schedule B to match Line 12 of Form 941.
The memo provides a great 4 step process to follow:
Step 1. Calculate the employer’s share of Social Security tax included in the liability to be reported.
Step 2. Compare that amount of employer Social Security tax on the wages paid for the first pay date to the amount of the payroll tax credit available for the quarter.
- If the credit is greater than or equal to the total amount of the employer’s share of the Social Security tax on wages paid for that pay date, then the tax is not required to be deposited.
- If the credit is less, the tax is reduced by the credit and the deposit is for the remaining tax due.
Step 3. Make sure to timely deposit the amount of liability of the amount of employer Social Security tax that cannot be offset by the credit, the amount of employee Social Security tax, the amount of employer and employee Medicare tax and the amount of income tax withholding.
Step 4. Carry the excess credit remaining to the succeeding pay dates in the return period by using steps 1-4 until the credit is used up. If it is not all used in the initial quarter after the election was made, you can carry it to following quarters.
For information regarding how to make the payroll tax research credit election, please see our other blog here.