Doubling of the Payroll Tax Credit Cap for Tax Year 2023

  • By Jonathan Ashton
    • Jan 30, 2024
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Payroll Credit Overview:

The Payroll Tax Credit is an election that can be made by qualified small businesses (QSBs), to apply all or a portion of their R&D tax credits towards offsetting social security tax liabilities rather than income tax liabilities. This is particularly useful for startup businesses that may not have an immediate income tax liability. R&D Tax Credits are based upon qualified research expenses that include wages, supplies, contractor expenses, and externally licensed computer use. For Payroll Tax Credit electors, the federal credit usually runs around 10% of qualified spend. Often, there are additional opportunities for state tax credits depending on your particular circumstances. If have any questions for our experts, schedule a call

Qualified Small Businesses:

A QSB is defined as a business that generated less than $5,000,000 of gross receipts for the current tax year, and did not report any gross receipts for any taxable year preceding the five taxable year period ending with the current taxable year. In simplified terms, a business potentially has up to five years of eligibility for Payroll Tax Credits beginning with the year it first generated gross receipts or first started claiming the payroll tax benefit.

Payroll Tax Credit History:

The Payroll Tax Credit was created for the 2016 tax filing season from the Protecting Americans from Tax Hikes Act (PATH Act). Initially, the amount of potential Payroll Tax Credits was capped at $250,000 for a single tax year, and $1,250,000 over five years. For the 2023 tax filing year and beyond, the Inflation Reduction Act (IRA) of 2022 doubled the cap on Payroll Tax Credits to $500,000 for a single tax year and $2,500,000 for a five-year period beginning on or after January 1st 2023.

Realizing the Benefit:

As in the past, up to $250,000 of credit can be taken to offset the 6.2% employer portion of social security payroll tax liabilities. The IRA introduced the potential for an additional $250,000 of credit to be applied offsetting the 1.45% of employer portion of Medicare Payroll Tax liability. As before, the Payroll Tax Credit cannot exceed the employer portion of tax (up to $250,000 for its Social Security obligation and up to $250,000 for its Medicare obligation) imposed for any calendar quarter. Unused credit is carried forward indefinitely, quarter to quarter until exhausted.

Payroll Tax Credits offset employer payroll taxes beginning with the first quarter after the company files its income tax return. On its income tax return, the company must elect to take all or a portion of its earned R&D tax credits as payroll tax credits. Once a business has made that election, the payroll tax credit is taken when the business makes its federal quarterly payroll tax filings, typically on form 941.

Special Considerations:

If your business uses a payroll provider or PEO, it is very important to share the knowledge of any earned Payroll Tax Credits with them, as they file and recoup the credits on your behalf. Some payroll providers may even offer options to reduce the amount of tax submitted with regularly scheduled payroll tax remittances in advance of quarter end, as they have the documented credit on hand. Thus, instead of waiting for a refund, your business would just pay less tax upfront. Be sure to check those intricacies with your payroll provider.

Final Analysis:

The changes to the Payroll Tax Credit benefit for 2023 and beyond are certain to bring a smile to many business owners’ faces. These added benefits are exactly what small businesses and startups need, to quickly grow and fuel development. At a time when funding can be scarce, it is comforting to know that there are growing opportunities to benefit startup businesses that are often on the forefront of innovation. Be sure to speak with your Leyton tax credit specialist on how the Payroll Tax Credit or other business credits and incentives can help power your company’s success.

Author

Jonathan Ashton

Research and Development Tax Credit Consultant

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