Frequently Asked Questions
Who is eligible for the Research Credit Offset Against Payroll Tax?
Available to 'qualified small businesses' (generally those with less than $5 million in gross receipts and no receipts for years prior to the 5-year period ending with the tax year) who make an election under section 41(h).
How does the Research Credit Offset Against Payroll Tax work?
Qualified small businesses can elect to apply a portion of their Section 41 research credit against the employer's share of Social Security and Medicare taxes rather than income tax.
What law authorizes the Research Credit Offset Against Payroll Tax?
The Research Credit Offset Against Payroll Tax is authorized under IRC §3111(f) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §3111
Source: Internal Revenue Code, Title 26, United States Code
§ 3111. Rate of tax(a) Old-age, survivors, and disability insuranceIn addition to other taxes, there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to 6.2 percent of the wages (as defined in section 3121(a)) paid by the employer with respect to employment (as defined in section 3121(b)).
(b) Hospital insuranceIn addition to the tax imposed by the preceding subsection, there is hereby imposed on every employer an excise tax, with respect to having individuals in his employ, equal to 1.45 percent of the wages (as defined in section 3121(a)) paid by the employer with respect to employment (as defined in section 3121(b)).
(c) Relief from taxes in cases covered by certain international agreementsDuring any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, wages received by or paid to an individual shall be exempt from the taxes imposed by this section to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.
[(d) Repealed. Pub. L. 115–141, div. U, title IV, § 401(b)(34), Mar. 23, 2018, 132 Stat. 1204]
(e) Credit for employment of qualified veterans(1) In generalIf a qualified tax-exempt organization hires a qualified veteran with respect to whom a credit would be allowable under section 38 by reason of section 51 if the organization were not a qualified tax-exempt organization, then there shall be allowed as a credit against the tax imposed by subsection (a) on wages paid with respect to employment of all employees of the organization during the applicable period an amount equal to the credit determined under section 51 (after application of the modifications under paragraph (3)) with respect to wages paid to such qualified veteran during such period.
(2) Overall limitationThe aggregate amount allowed as a credit under this subsection for all qualified veterans for any period with respect to which tax is imposed under subsection (a) shall not exceed the amount of the tax imposed by subsection (a) on wages paid with respect to employment of all employees of the organization during such period.
(3) ModificationsFor purposes of paragraph (1), section 51 shall be applied—(A) by substituting “26 percent” for “40 percent” in subsection (a) thereof,
(B) by substituting “16.25 percent” for “25 percent” in subsection (i)(3)(A) thereof, and
(C) by only taking into account wages paid to a qualified veteran for services in furtherance of the activities related to the purpose or function constituting the basis of the organization’s exemption under section 501.
(4) Applicable periodThe term “applicable period” means, with respect to any qualified veteran, the 1-year period beginning with the day such qualified veteran begins work for the organization.
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