Can R&D Tax Credits Be Used to Offset State Payroll Taxes or Only Federal Payroll Taxes?
Table of contents
If you’re a startup founder or finance leader, you may have heard that R&D tax credits can help offset payroll taxes. But can these credits be used for both federal and state payroll taxes, or only federal? Here’s what you need to know:
Federal Payroll Tax Offset
The federal R&D tax credit is especially valuable for early-stage companies that aren’t yet profitable. Thanks to recent legislation, qualified small businesses can use the federal credit to offset up to $500,000 of their federal payroll tax liability per year.
Key facts:
- Only the employer’s share of Social Security and Medicare taxes (FICA) can be offset.
- The credit is available to companies with less than $5 million in gross receipts and within five years of their first gross receipts.
- The offset applies only to federal payroll taxes, not to any state payroll tax obligations.
What About State Payroll Taxes?
Here’s where things get tricky:
- The federal R&D tax credit cannot be used to reduce state payroll tax liabilities.
- Each state has its own payroll tax system, and federal credits do not transfer over.
State R&D Credits
Many states offer separate R&D tax credits, but these programs are distinct from the federal version.
Consider:
- State R&D credits typically offset state income or franchise taxes.
- A few states offer refundable credits or allow credits to offset other state-level business taxes.
- The rules, eligibility, and application processes vary widely by state.
Best Practices
- Track and claim federal and state credits separately.
- Consult a tax advisor to maximize your benefit and avoid compliance pitfalls.
- Stay updated on both federal and state legislation, as rules can change.
So remember, you can use R&D tax credits to offset federal payroll taxes, but not state payroll taxes. State R&D credits exist, but they generally do not apply to payroll taxes.
Want to make sure you’re getting the most out of your R&D tax credits?Contact us for a free consultation.
Recent questions
- What Is Net Working Capital in M&A, and Why Does It Matter for Deal Value?
- How Can Startups Identify and Track Sales Tax Nexus Across Multiple States to Ensure Full Compliance?
- Can R&D Tax Credits Be Used to Offset State Payroll Taxes or Only Federal Payroll Taxes?
- The Financial Risks of Relying on Low-Cost Accounting or Tax Services, and Their Impact on Startup Growth
- What types of business bank accounts should a new startup open, and how should funds be allocated between them for optimal financial management?
Top viewed questions
- What happens if the IRS audits me and I do not have the receipt for an expense (assuming it was a legitimate expense)?
- How should convertible note financing be handled on the balance sheet?
- How do startups account for equity and fundraising on the Balance Sheet?
- For startups incorporating in Delaware, what firms are good registered agents to use?
- 2025 Founder Salaries by Stage