The R&D Tax Credit allows qualified small businesses to claim ~10% of their domestic R&D expenses back in the form of a tax credit of up to $500,000. Each payroll cycle, you as an employer, are required to pay FICA payroll taxes for your employees. This R&D tax credit is claimed as a reimbursement for the FICA taxes paid. Each quarter, your payroll platform will file form 8974 which breaks down the amount of FICA taxes you paid in the previous quarter. The IRS will then send you a check, reimbursing you for those taxes. This will continue to happen each quarter until your credit is fully used up. 

Table of Contents

• Who Qualifies?

• Claiming the R&D tax credit with your payroll provider

Who Qualifies?

To claim the payroll R&D tax credit, your business must:

• Have less than $5 million in gross receipts (revenue) in the current tax year, and

• Not have had gross receipts (revenue) in any tax year more than five years prior to the current year

These requirements make the payroll R&D credit ideal for startups and young companies that are actively developing technology or products but are not yet profitable.

In addition to meeting the gross receipts test, your business must be engaged in qualified research activities as defined by the IRS.

What Counts as Qualified R&D?

Qualified research activities don’t have to be cutting-edge science—they simply need to involve technical development and experimentation. If your company has engineers on staff and is building software, hardware, biotech solutions, or even improving existing systems, you may qualify.

To be eligible, the activities must meet the IRS’s Four-Part Test:

• Permitted Purpose: The work must aim to create or improve a product, process, software, or technique with improved performance, functionality, or reliability.

• Technological in Nature: The project must rely on principles of engineering, computer science, biology, chemistry, or a similar hard science.

• Elimination of Uncertainty: You must face technical uncertainty about how to achieve your goals or whether a solution is even possible.

• Process of Experimentation: There must be a systematic trial-and-error process to evaluate possible solutions.

Examples of Qualified Expenses:

• Wages paid to employees who directly perform, supervise, or support R&D

• Domestic contractor payments for services directly related to qualified research 

• Supplies and materials consumed in the course of research and development

How Does It Work?

Claiming the payroll R&D tax credit involves both your income tax return and your payroll provider:

1. Calculate the Credit:

• Work with your CPA or R&D tax credit specialist to determine your qualified research expenses and calculate the credit amount using IRS Form 6765.

2. File Form 6765 with Your Federal Income Tax Return:

• Be sure to elect the payroll tax offset on the form 

3. Enable the Credit with Your Payroll Provider:

• After your return is filed, your payroll provider (such as Gusto, Rippling, or Justworks) will help apply the credit to your payroll taxes by filing Form 8974 alongside your quarterly Form 941 payroll filings.

Start Seeing the Benefit:

The payroll tax credit is typically applied beginning in the first full quarter after your tax return is filed. For example, if your return is filed in April, you’ll begin offsetting payroll taxes starting with Q3 of that calendar year.

Claiming the R&D tax credit with your payroll provider

Gusto:

1. Gusto requires your accountant to enable the credit. They can do so by logging into their Gusto accountant account and finding your company name in their client list

2. Click the three dots next to the client name and select “Redeem third-party R&D tax credits”

3. Fill in the required information and select “Save & Continue”

4. Review the information submitted and click “Submit”

Rippling:

1. Head to the “Payroll” section of your Rippling account

2. Once in payroll, click on “Settings”

3. Under settings click on “Federal R&D Tax Credit”

4. Choose “Add New” in the top right of your screen

5. Fill in the requested information and click “Save credits and authorize Rippling”

Justworks:

1. Click on “R&D Tax Credit” in the left side bar under “Payments”

2. Choose “Get Started” on the right side of your screen for the tax year that you are claiming the tax credit for

3. Fill in the requested information, upload the requested documents and click submit.

Warp:

1. Email support@joinwarp.com your completely filled out form 6765 and the below information:

   1. Amount claiming in credits

   2. Amount of credits used previously (usually zero)

   3. Date income taxes were filed and type of tax return filed (most common is 1120)

   4. End date of tax income period