Can a Small Business Use the R&D Credit Against Payroll Taxes?

Yes, if it's a qualified small business. A young company with gross receipts under $5 million for the year, and no gross receipts in any year before the 5-tax-year period ending with that year, can elect to apply up to $500,000 of its federal research credit against payroll taxes instead of income tax. The IRS says the election is designed for startups with little or no income tax to offset. The credit reduces the employer's share of Social Security tax first and then the employer's share of Medicare tax.

Last checked: October 29, 2026. This page explains the rules only. It is general information, not tax, legal, or financial advice, and it doesn't estimate what any business can claim.

The short version

How the election works

1. Figure your research credit for the year on Form 6765. The credit itself comes from Section 41, and it's based on qualified research expenses above a base amount. Our guide to who is really eligible for the R&D tax credit covers the four-part test and what counts as a qualified research expense.
2. Make the payroll tax election in Section D of Form 6765, choosing the amount to apply against payroll taxes. The election has to be made by the due date of the original return, including extensions. The IRS says it can't be made on an amended return.
3. File the income tax return with Form 6765 attached. For a partnership or S corporation, the election is made at the entity level.
4. Starting with the first calendar quarter that begins after you file that return, claim the credit on Form 8974 attached to your Form 941 (or Form 943 or 944).
5. Use the credit against the employer's share of Social Security tax, then the employer's share of Medicare tax. Whatever is left carries over to the next period's payroll tax return.

Rules worth knowing before you elect

• The election is made one year at a time, and once made it can be revoked only with IRS consent.
• The amount you can elect is the smallest of the year's research credit, the amount you elect (up to the $500,000 cap), or, for businesses other than partnerships and S corporations, the general business credit carryforward for the year.
• It only reduces the employer's portion of these taxes. It doesn't touch employee withholding.
• Members of a controlled group are treated as one taxpayer: their gross receipts are combined for the test, the $500,000 cap is shared, and an election by any member counts toward the 5-year limit for the group.
• Tax-exempt organizations can't be qualified small businesses.
• Gross receipts for this test follow the section 448(c)(3) rules referenced in the Form 6765 instructions, not the research credit's own gross receipts definition.