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Jun

Payroll Tax Credit: What Small Businesses and Startups Need to Know About Utilizing this Tax Credit

The PATH ACT, passed in December 2015, not only made the Research & Development (R&D) Tax Credit permanent, but also allows Startup companies to get in on the tax saving action. Startup companies are now eligible to offset payroll taxes with the R&D Tax Credit.

How do I qualify to use the tax credits?

To qualify, a business must have:

  • Current year (2016) gross receipts of less than $5 million
  • No gross receipts prior to a 5 year grace period. For the 2016 tax year, no gross receipts prior to 2012

How does it work?  

  • On a yearly basis, a business must:
    • Complete Form 6765 (Credit for Increasing Research Activities) after computing the R&D Tax Credit based on a study of R&D activities and expenditures. This form is included on a company’s federal tax return.
  • On a quarterly basis:
    • Complete Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities), which tracks how much of the R&D Tax Credit a company has remaining to offset payroll taxes.
    • Complete Form 941 (Quarterly Federal Tax Return) and attach Form 8974 to use the R&D Tax Credit to offset payroll taxes.

Note that, even if you have filed your 2016 taxes, the IRS is allowing startups and small businesses the opportunity to go back and amend their returns to claim this valuable credit. However, returns must be filed by December 31, 2017.

This entire process can be handled by utilizing a tax credit consultant, such as HIREtech, working in conjunction with a company’s CPA and payroll provider or Professional Employer Organization (PEO).

When can these credits be used?

For Startups and small businesses that have or are planning on filing returns for 2016, these credits can be utilized in the first calendar quarter after filing the return. For example, if a business filed their tax return by March 31, 2017, they would be able to begin utilizing the credit on the Q2 quarterly payroll tax payment (due in July).

Working with a payroll company or PEO?

If a company uses an outside payroll company that files Form 941 on their behalf, the company will need to provide them with a copy of its Form 6765. The payroll company will then fill out the Forms 8974 and 941. HIREtech can work directly with your payroll company to ensure that the credits are taken correctly.

Working with a PEO can be a little different, as the PEO can apply payroll credits against its member-companies share of payroll taxes. HIREtech is familiar with this process and is happy to work alongside you and your PEO to ensure that the process is in place for you to benefit from this tax credit.

For more information regarding the Startup Tax Credit contact HIREtech, info@hiretech.com or 844.HIREtec.