Explainer Federal Payroll Credits for Research Activity - How the Credits are Claimed - The Inflation Reduction Act of 2022 Enhancements

Sep 20, 2026

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Beginning in 2023, the Inflation Reduction Act of 2022 expands a federal payroll credit for small business employers that invest in qualifying U.S. research activity. The new election allows up to $250,000 in payroll credits that offset future Medicare tax obligations, building on the existing program that previously offset FICA obligations up to $250,000 per year. For post-2022 tax years, total eligible elections can reach $500,000, with the first portion tied to FICA and the excess tied to Medicare. The article explains qualification, timing, carryforward treatment, and claim mechanics through payroll returns.

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Pages4

Reading Time2 min

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Beginning in 2023: Expanded payroll credit election

Credit limits and FICA vs. Medicare offsets

Background: the 2015 Act payroll credit program

Example scenarios and timing of claims

Definition of a qualified small business

How the credit is claimed (the forms)

CLARK NUBER PS 10900 NE 4th Street Suite 1400 Bellevue, WA 98004 Explainer: Federal Payroll Credits for Research Activity, How the Credits are Claimed, and The Inflation Reduction Act of 2022 Enhancements Description Beginning in 2023, the Inflation Reduction Act of 2022 (the 2022 Act) allows small business employers who invest in research activity to elect a new payroll credit of up to $250,000 . (This goes beyond the $250,000 currently allowed (see below), for a potential annual total payroll credit of $500,000) . When applicable, the new payroll credit offsets the electing employerâ??s future Medicare tax obligations (i.e. , 1.45% of all wages paid, also known as the â??Hospital Insurance Taxâ?•) . As noted above, the new credit program augments the existing payroll credit election. Since 2016, qualifying taxpayers who make a timely filed election can use credits generated through investment in research activity as future payroll tax credits up to $250,000 . Elections made for years prior to 2023 could/can only offset the electing employerâ??s â??FICA Taxâ?• obligations (i.e. , 6.5% of applicable wages, also known as Old Age, Survivors, and Disability Insurance Taxes) . For years beginning after 2022, small businesses who annually generate sufficient research credits can now elect up to a total of $500,000 credits per year. However, itâ??s important to note that the first $250,000 of elected credits offset only FICA tax. Any amount elected over $250,000 can only offset Medicare tax up to an additional $250,000 . The new law also implies the type of credit is established atthe time of the election. That means any carryforward of the payroll credits retain their character as either a FICA tax credit or a Medicare tax credit, depending on the total amount of the original year election. To claim the payroll credits, a taxpayer must meet the definition of a â??qualified small businessâ?•(see below) and generate sufficient research activity credits. The research must be performed in the United States. The election is available annually when made in a timely filed federal income tax return. Background on the Payroll Credit Program The Protecting Americans from Tax Hikes Act of 2015 (â??the 2015 Actâ?•) created a new incentive program for small businesses that invest in qualifying research. Beginning in 2016, the 2015 Act allowed taxpayers to elect to treat credits generated from qualifying research activity as â??payroll credits.â?•(The annual limit on the election is $250,000 . ) The payroll credit election is made in the taxpayerâ??s income tax return for the year the credit is originally generated. The resulting payroll credit is claimed in the taxpayerâ??s payroll return as an offset to the employerâ??s future FICA tax obligation. The taxpayer can begin to claim the payroll credit in the payroll return for the first quarter that begins after the date the taxpayer files its annual income tax return containing the election. If the credit exceeds the actual FICA tax liability for the first eligible quarter, the remaining credit carries forward to future quarters until it is fully utilized. Page 1 This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.Clark Nuber, PS CLARK NUBER PS 10900 NE 4th Street Suite 1400 Bellevue, WA 98004 The new payroll tax program created by the 2015 Act was a welcome addition to the incentives associated with research for small businesses. Prior to this program, pre-revenue companies could only enjoy the cash benefit of the research credit in a future period when the company finally generated sufficient revenue to reach profitability. As a result, many early-stage companies never enjoyed the intended timely cash flow boost the research credit progra

FAQs

What change does the Inflation Reduction Act of 2022 make to the payroll credit election beginning in 2023?

It allows eligible small business employers to elect a new payroll credit of up to $250,000 based on qualifying U.S. research activity, which offsets future Medicare tax obligations.

How do the credit limits work for years beginning after 2022 when electing up to $500,000?

The first $250,000 of elected credits offset FICA tax, while any amount elected over $250,000 can offset Medicare tax up to an additional $250,000.

What qualifies a taxpayer as a “qualified small business” for this payroll credit?

Revenue (gross receipts) for the year must be under $5 million, and the year must fall before or within a five consecutive year window beginning with the first year gross receipts are reported. Related taxpayers are tested together under a single taxpayer approach.

Sep 20, 2026

Upload by Eliana