Whether you’re a bootstrapping startup or a major global company, you probably have something in common with most other businesses: payroll is one of your biggest expenses. That includes the wages you pay your team, of course. But the benefits packages and taxes that come with those wages add to the total, too.
We can’t help with all of that, but we do have a way certain companies can reduce the toll there. If you’re a qualifying small business, you can apply your R&D credit to up to $500,000 of your payroll taxes. That means you can potentially take half a million off the total you pay for Social Security and Medicare for your employees.
As we close the books on 2025, knowing about this huge savings opportunity makes a difference. Let’s dig into the way you can use the R&D tax credit to offset your payroll taxes for the upcoming tax year.
Key things to know about the R&D tax credit’s application to payroll taxes
Larger, more established businesses typically apply the R&D tax credit to their income taxes. But if you’re a pre-profit company, these major tax savings can still offer upside.
To support R&D activities for companies even before they have income tax liability, Section 41 of the Internal Revenue Code lets qualifying small businesses apply this tax credit to their payroll taxes. That means you can use it to reduce what you pay in Medicare and Social Security taxes for your employees.
If you’re thinking about going this route, there are a couple of categories you need to consider:
What is a Qualifying Small Business (QBS)?
You’re only able to apply this credit to your payroll taxes if you’re a QBS. That means you have gross receipts of under $5 million for the 2025 tax year and no tax receipts prior to five years ago (i.e., your company is younger than five years old and doesn’t have tax receipts before 2021).
The details of covering payroll taxes (limit and application)
If you elect to apply the credit to payroll taxes, you’ll be subject to a maximum of $500,000 (up from $250,000 thanks to the Inflation Reduction Act).
Then, the IRS applies that to your payroll taxes in a specific order. First, it goes toward the 6.2% you cover for your employees’ Social Security. If there’s anything left over, it can then go toward the 1.45% you pay for Medicare (that’s new for tax years 2023 on, again thanks to the Inflation Reduction Act).
A quick note about the One Big Beautiful Bill Act
The One Big Beautiful Bill Act (OBBBA) doesn’t directly impact the R&D tax credit, but it does impact how your company can apply qualifying research expenses to its tax bill. Specifically, the OBBBA did away with the amortization requirement for domestic R&D expenses. That means you can fully expense the qualifying amounts you paid in 2025 on your next filing.
Section 280C of the Internal Revenue Code dictates how R&D expensing and tax credits work together to prevent companies from double-dipping. If the OBBBA’s changes to R&D deductions mean you’ll expense more this year, you’ll need to take a reduced credit.
Our team can help you figure out the most financially advantageous way to use both the R&D deduction and the R&D tax credit.
Form 6765: Changes for 2025
As you can probably expect, the IRS isn’t going to freely extend this potentially sizable credit to you. Instead, you need to complete some steps to both claim this credit and apply it toward the employer portion of your payroll social security tax.
That starts with completing and submitting Form 6765, Credit for Increasing Research Activities. To claim the credit, you need to get this submitted by attaching it to your business income tax return.
The IRS recently completed a pretty major overhaul of this form, and 2025 is the first tax year where every portion of the redesigned form is required.
What’s new for this filing season
As our team recently said when providing guidance for other CPAs, “This four-page form now demands richer narrative disclosures, granular cost allocations, and expanded controlled-group reporting.” In other words, completing the form now requires more detail and more work.
The big requirements here come from four categories interwoven in the form:
- Form 6765 now requires narrative project descriptions for every research initiative.
- You now need to directly tie business components to qualified research expenses and provide component-level cost reporting there.
- The IRS now requires you to provide detailed wage breakouts, segmenting wages that count as qualified research expenses into one of three categories: direct research, supervisory, or support functions.
- With a new controlled group disclosure requirement, you now need to check a box and attach additional documentation (i.e., your EIN, NAICS code, and proportional share of qualified research expenses) if you’re a member of a controlled group.
With Form 6765 submitted with your 2025 tax returns, you still need to complete one more step to tell the IRS you want to apply that credit toward your payroll taxes. Specifically, you need to complete and submit Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. To submit it, you need to attach it to your payroll tax returns (e.g., your quarterly Form 941).
While additional quarterly paperwork probably sounds like a hassle, Form 8974 is only one page. Better still, our team can handle its preparation and filing for you.
Support in applying the R&D tax credit to your payroll taxes
This gives you a pretty good look at what to expect when you file for 2025. That said, it leaves out key pieces like calculating the size of the credit you can claim. You can do that in one of two ways. Our team can help you decide which option is best for your company, helping you maximize the payroll tax benefits of your R&D expenses.
For support navigating all of this, we’re here. Don’t let the 2025 tax filing season slip by without tapping into this potential for big savings for your business. Contact us today.
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