Form 8974 Instructions
Instructions for Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities
Rev. December 2023
Related Forms
- Form 8974 - Quarterly Small Business Payroll Tax Credit for Increasing Research Activities
Department of the Treasury
Internal Revenue Service
Instructions for Form 8974
(Rev. December 2023)
Qualified Small Business Payroll Tax Credit for Increasing Research Activities
Section references are to the Internal Revenue Code
unless otherwise noted.
share of social security tax and the employer share of
Medicare tax, is then carried forward to the next quarter.
For more information about the payroll tax credit, go to
Future Developments
For the latest information about developments related to
Form 8974 and its instructions, such as legislation
enacted after they were published, go to IRS.gov/
General Instructions
Purpose of Form 8974
Use Form 8974 to determine the amount of the qualified
small business payroll tax credit for increasing research
activities that you can claim on Forms 941, 943, or 944.
These filers will also have the option to file the related
forms such as the corresponding non-English language
forms for all forms within the related series.
What’s New
Forms 941-PR, 941-SS, 943-PR, and 944 (sp) referen-
ces removed. Beginning with filings for tax year 2023,
former filers of Form 943-PR will instead file Form 943,
Employer's Annual Federal Tax Return for Agricultural
Employees. These filers will also have the option to file the
new Spanish-language Form 943 (sp). Form 943-PR is
being discontinued. Beginning with filings for the first
quarter of 2024, former filers of Form 941-SS will instead
file Form 941, Employer’s QUARTERLY Federal Tax
Return, issued in and for the first quarter of 2024. These
filers will also have the option to file the new
Where authority is granted for any form, it is also
effective for related forms such as the corresponding
non-English language form. For example, Form 8974 can
be used to provide authorization for Form 941 (sp) using
the entry spaces for Form 941.
Who Must File Form 8974?
Spanish-language Form 941 (sp). The new Form 941 (sp)
will also similarly replace Form 941-PR, which is being
discontinued along with Form 941-SS. Form 941 (sp), 943
(sp), and 944 (sp) will be usable by any employer that
prefers their form in Spanish, whether they are located in
the United States, Puerto Rico, or one of the other
territories. Where authority is granted for any form, it is
also effective for related forms such as the corresponding
non-English language form.
You must file Form 8974 and attach it to Form 941, 943, or
944 if you made an election on your income tax return to
claim the qualified small business payroll tax credit for
increasing research activities against your payroll taxes.
The payroll tax credit must be elected on an original
income tax return that is timely filed (including
extensions). The election is made on Form 6765. If you
haven’t filed the income tax return making the election to
claim the payroll tax credit on Form 6765, you can’t file
Form 8974 and can’t claim the qualified small business
payroll tax credit for increasing research activities against
your payroll taxes on Form 941, 943, or 944.
Reminders
The qualified small business payroll tax credit for in-
creasing research activities has increased and been
modified. For tax years beginning before January 1,
2023, a qualified small business may elect to claim up to
$250,000 of its credit for increasing research activities as
a payroll tax credit. The Inflation Reduction Act of 2022
(the IRA) increases the election amount to $500,000 for
tax years beginning after December 31, 2022. The payroll
tax credit election must be made on or before the due date
of the originally filed income tax return (including
You can’t claim the qualified small business
payroll tax credit for increasing research activities
!
CAUTION
on Form 941, 943, or 944 unless you make the
election on Form 6765 and then file Form 8974 attached
to Form 941, 943, or 944.
Aggregate Form 941 or Form 943
If you're a section 3504 agent or a certified professional
employer organization (CPEO), you must complete
Schedule R (Form 941), Allocation Schedule for
extensions). The portion of the credit used against payroll
taxes is allowed in the first calendar quarter beginning
after the date that the qualified small business filed its
income tax return. The election and determination of the
credit amount that will be used against the employer's
payroll taxes are made on Form 6765, Credit for
Aggregate Form 941 Filers, when filing an aggregate Form
941, or Schedule R (Form 943), Allocation Schedule for
Aggregate Form 943 Filers, when filing an aggregate Form
943. Other third-party payers that file an aggregate Form
941 or 943, such as non-certified PEOs, must complete
and file Schedule R if they have clients that are claiming
the qualified small business payroll tax credit for
Increasing Research Activities. The amount from Form
6765, line 44, must then be reported on Form 8974.
Starting in the first quarter of 2023, the payroll tax credit
is first used to reduce the employer share of social
increasing research activities. For you to claim the credit,
your client must be a qualified small business and must
elect to apply the research credit against payroll tax
liability by attaching Form 6765 to its timely filed income
security tax up to $250,000 per quarter and any remaining
credit reduces the employer share of Medicare tax for the
quarter. Any remaining credit, after reducing the employer
Dec 6, 2023
Cat. No. 68750R
tax return. Additionally, you must attach a Form 8974 for
each client that is taking the credit. See the instructions for
information.
Specific Instructions
Enter Your Business Information
Enter your employer identification number (EIN) and name
at the top of Form 8974. Make sure that they exactly
match the name of your business and the EIN that the IRS
assigned to your business and also match the name and
EIN shown on Form 941, 943, or 944. Also check a box to
tell us on which form you'll take the credit from Part 2,
line 12 or, if applicable, line 17. Check only one box.
Correcting Form 8974
If you discover an error on a previously filed Form 8974,
make the correction by filing Form 941-X, Adjusted
Employer's QUARTERLY Federal Tax Return or Claim for
Refund; Form 943-X, Adjusted Employer's Annual Federal
Tax Return for Agricultural Employees or Claim for Refund;
or Form 944-X, Adjusted Employer's ANNUAL Federal Tax
Return or Claim for Refund, as applicable. Attach a
corrected Form 8974 to your amended return. For more
information, see the instructions for Form 941-X, 943-X, or
944-X.
If you’re filing Schedule R with Form 941 or Form
943, the EIN entered at the top of each client’s or
!
CAUTION
customer’s Form 8974 must be the EIN of the
client or customer.
Calendar Year
When Must You File?
Quarterly Form 941 Filers
Enter the calendar year as shown on the attached Form
941, 943, or 944.
Check the Box for the Quarter (Forms
941 Series Only)
You can first claim the qualified small business payroll tax
credit for increasing research activities on the Form 941
for the quarter that begins after you file your income tax
return that makes the election on Form 6765. The Form
941 for that quarter is the Form 941 on which you’re
required to claim the credit. You can’t claim the credit
related to this election on a different quarter’s Form 941
unless it is to take a carryforward credit from the required
quarter, as determined on Form 8974.
Example for Form 941 filers. If you file your 2023
income tax return based on a calendar year (January 1–
December 31) on March 15, 2024, the 2024 second
quarter (April 1, 2024–June 30, 2024) Form 941, which is
filed by July 31, 2024, is the first quarter that you can take
the qualified small business payroll tax credit for
increasing research activities.
Under Report for this quarter at the top of Form 8974,
check the appropriate box of the quarter for which you’re
filing Form 8974. The quarter must match the quarter as
shown on Form 941. Check only one box.
Part 1: Tell Us About Your Income Tax
Return
Lines 1–5
The payroll tax credit election on Form 6765 is limited to 5
tax years (including if members of your controlled group
previously made the election). Use lines 1–5 to report the
credit from each tax year. Enter the income tax years in
chronological order with the earliest year entered on
line 1. You must continue to report each income tax year
election until the remaining credit (column (g)) for the
income tax year reaches zero.
Annual Form 943 or 944 Filers
You can first claim the qualified small business payroll tax
credit for increasing research activities on the Form 943 or
944 for the year that includes the quarter that begins after
you file your income tax return that makes the election on
Form 6765. The Form 943 or 944 for the year that includes
that quarter is the Form 943 or 944 on which you’re
required to claim the credit. You can’t claim the credit
related to this election on a Form 943 or 944 for a different
year unless it is to take a carryforward credit from the
required year, as determined on Form 8974.
Column (a)
Enter the ending date of your income tax period. Enter the
date as “MM/DD/YYYY.” For example, if your 2023 income
tax return was for a calendar year, enter “12/31/2023.” If
your income tax return was for a fiscal year that ended on
June 30, 2023, enter “06/30/2023.”
Example for Form 943 or 944 Filers. If you filed your
2023 income tax return based on a calendar year
(January 1–December 31) on March 15, 2024, the 2024
second quarter (April 1, 2024–June 30, 2024) is the first
quarter that you can take the qualified small business
payroll tax credit for increasing research activities.
Therefore, the 2024 Form 943 or 944, which is filed by
January 31, 2025, is the first year on which you can claim
the credit.
Column (b)
Tell us which income tax return you filed that elected a
qualified small business payroll tax credit on Form 6765.
Form 6765 can be attached to Form 1040, 1065, 1120,
1120-F, or 1120-S.
Column (c)
Tell us the date that you filed your income tax return that is
shown in column (b). Enter the date as “MM/DD/YYYY”
(for example, “03/15/2024”).
-2-
Instructions for Form 8974 (Rev. 12-2023)
amount from your 2023 income tax return, and enter
$100,000 in column (g). You complete lines 7–17 and
learn that you can only use $75,000 of the credit for the
second quarter of 2024. You have a $25,000 carryforward
to the third quarter of 2024.
On the Form 8974 that you attach to your third quarter
2024 Form 941, you’ll enter on line 1, columns (a)–(d), the
same information (your 2023 income tax return
Column (d)
If the EIN used on Form 8974 isn’t the same as the EIN
used on Form 6765, enter the EIN that was used on Form
6765. Generally, the EIN used on Form 8974 should be
the same as the EIN used on Form 6765. However, if
you’re a member of a controlled group of corporations (as
defined in sections 41(f)(1)(A) and (f)(5)) or a member of a
group of trades or businesses under common control (as
defined in section 41(f)(1)(B) and Regulations section
1.41-6(a)(3)(ii)), the EIN used on Form 6765 may be
different from the EIN that you must use on Form 8974.
information) that you reported on the previously filed Form
8974, line 1, columns (a)–(d) (the Form 8974 that you
attached to your second quarter 2024 Form 941). You’ll
enter $100,000 in column (e) (same as you did for the
second quarter of 2024) but now you must also enter
$75,000 in column (f) because this is the amount of the
credit from column (e) that you claimed in a previous
period. You’ll enter $25,000 in column (g), which is your
carryforward from the prior quarter.
Column (e)
Generally, enter the amount from Form 6765, line 44.
However, if you’re a member of a controlled group of
corporations (as defined in sections 41(f)(1)(A) and (f)(5))
or a member of a group of trades or businesses under
common control (as defined in section 41(f)(1)(B) and
Regulations section 1.41-6(a)(3)(ii)), enter the amount of
the credit that was allocated to your EIN. As a member,
your credit is determined on a proportionate basis to your
share of the aggregate qualified research expenses for
increasing research activities taken into account by the
group for the research credit. The amount entered in
column (e) may not exceed $250,000 for each income tax
year beginning before January 1, 2023. For each income
tax year beginning after December 31, 2022, the amount
entered in column (e) may not exceed $500,000.
applies to Forms 943 and 944. However, the
remaining credit from one year is carried forward
TIP
to the following year.
Additional years. If you claim the payroll tax credit on
Form 6765 on an additional year's income tax return, you’ll
enter the additional payroll tax credit using the additional
rows in Part 1, with the earliest year entered on line 1.
There are 5 rows in Part 1 because the payroll tax credit
election is limited to 5 tax years. While the amount you
enter in column (e) may not exceed $250,000 per row for
each income tax year beginning before January 1, 2023,
and $500,000 for each income tax year beginning after
December 31, 2022, the total amount entered on line 6,
column (g), and line 7 may exceed $500,000 if you
claimed the credit in multiple years and you're still carrying
forward unused credit from earlier years.
Column (f)
Enter the amount of the credit from column (e) that was
taken in a previous period or previous periods.
Part 2: Determine the Credit That You
Can Use This Period
Column (g)
Subtract column (f) from column (e) and enter the result in
column (g). Add all of the amounts in column (g) of lines
1–5, and enter the result on line 6, column (g). This is the
total amount of credit you have available for the current
quarter (Form 941) or year (Form 943 or 944).
Carryforward. If the qualified small business payroll tax
credit for increasing research activities reported in column
(e) can’t be fully used in the first quarter after the income
tax return is filed because it was limited to the amount of
the employer share of social security tax (and the
employer share of Medicare tax for quarters beginning
after December 31, 2022) on the wages of your
employees for the quarter, you can carry forward any
unused amount to the next quarter. If, in the next quarter
the amount carried over from the first quarter can’t be fully
used, then you can carry forward any unused amount to
subsequent quarters.
Example. You elected to take $100,000 as a qualified
small business payroll tax credit for increasing research
activities when you filed your 2023 income tax return on
March 15, 2024. On the Form 8974 that you attach to your
second quarter 2024 Form 941, you enter $100,000 in
column (e), leave column (f) blank because the second
quarter of 2024 is the first time you’re using the elected
Line 7
Enter the amount from Part 1, line 6, column (g).
Line 8
Enter the amount from Form 941, line 5a, column 2; Form
943, line 3; or Form 944, line 4a, column 2. This is the total
amount of social security tax on wages.
If you’re filing an aggregate Form 941 or 943, you
must file a Form 8974 for each client that is taking
!
CAUTION
the qualified small business payroll tax credit for
increasing research activities. Also, you can’t enter the
amount from Form 941, line 5a, column 2; or Form 943,
line 3, on line 8 of any of the Forms 8974 that are attached
to the aggregate Form 941 or 943. This portion of the
credit is based on each employer’s liability for social
security tax. Therefore, you must enter on line 8 of each
client’s Form 8974 the amount that the client would’ve
reported on Form 941, line 5a, column 2; or Form 943,
line 3, if the client filed its own Form 941 or 943. See
Line 11 Adjustment for Filers of Form 943 or 944, later, for
additional adjustments you may need to make if you file
Form 943.
Instructions for Form 8974 (Rev. 12-2023)
-3-
Line 9
Line 11 (before considering Form 941, line 8)
– Amount of social security tax included on Form 941, line 8
Enter the amount from Form 941, line 5b, column 2; or
Form 944, line 4b, column 2. This is the total amount of
social security tax on tips.
= Final amount to enter on line 11
If you’re filing an aggregate Form 941, you must
Example. You entered $12,400 on Form 8974, line 8,
and zero on line 9. Line 10 was also $12,400. 50% of
line 10 is $6,200. However, this amount must be adjusted
because you reported $6,120 ($4,960 of social security
tax and $1,160 of Medicare tax) on Form 941, line 8. You
must subtract $4,960 (amount of social security tax
reported on Form 941, line 8) from $6,200 (50% of the
amount reported on line 10) and enter $1,240 on line 11.
Adjustment if you didn’t transfer liability. If you didn’t
transfer the liability for the employer’s share of social
security tax to the employer (client) and you paid the
employer social security tax on the third-party sick pay
that you paid on behalf of the client, you must reduce the
amount reported on line 11 by any employer social
security tax (included on Form 941, line 5a, column 2) that
was for the employees of the client.
file a Form 8974 for each client that is taking the
!
CAUTION
qualified small business payroll tax credit for
increasing research activities. Also, you can’t enter the
amount from Form 941, line 5b, column 2, on line 9 of any
of the Forms 8974 that are attached to the aggregate
Form 941. This portion of the credit is based on each
employer’s liability for social security tax. Therefore, you
must enter on line 9 of each client’s Form 8974 the
amount that the client would’ve reported on Form 941,
line 5b, column 2, if the client filed its own Form 941.
Line 10
Add lines 8 and 9. Enter the result on line 10.
Line 11
Multiply line 10 by 50% (0.50). The first $250,000 of the
qualified small business payroll tax credit for increasing
research activities can only be used against the
employer’s share of social security tax reported on Form
941, 943, or 944. The amount on line 10 is the total
amount of social security tax (both the employer and
employee share), so you must multiply line 10 by 50% to
limit the credit to the employer’s share of social security
tax.
Line 11 (before adjustment for third-party sick pay)
– Amount of employer's share of social security tax (on wages paid to
clients’ employees) included on Form 941, line 5a, column 2
= Final amount to enter on line 11
Example. You entered $12,400 on Form 8974, line 8,
and zero on line 9. Line 10 was also $12,400. 50% of
line 10 is $6,200. However, this amount must be adjusted
because the amount from Form 941, line 5a, column 2,
that was entered on line 8 included the employer’s share
of social security tax that you paid for the wages paid to
your client’s employees. There isn’t a line on Form 941
that can assist in this calculation but you must still
determine the amount of Form 941, line 5a, column 2, that
was for wages paid to your client’s employees. For
purposes of this example, if you determine that $5,000 of
the employer’s social security tax included on Form 941,
line 5a, column 2, was attributable to your client’s
employees, you must subtract $5,000 from $6,200 (50%
of the amount reported on line 10) and enter $1,200 on
line 11.
If you file Form 943 or 944, don't multiply line 10
by 50%. Instead, see Line 11 Adjustment for Filers
!
CAUTION
of Form 943 or 944, later. If you’re a third-party
payer of sick pay or you received a Section 3121(q) Notice
and Demand, check the applicable box on line 11 and see
the instructions next.
Third-Party Payers of Sick Pay
If you’re a third-party payer of sick pay that files
Form 944, you can follow the directions below by
substituting references to Form 941, line 8, with
TIP
Form 944, line 6; and Form 941, line 5a, column 2, with
Form 944, line 4a, column 2.
Section 3121(q) Notice and Demand
You can only take up to $250,000 of the qualified small
business payroll tax credit for increasing research
activities against the employer’s share of social security
tax on wages paid to your employees each quarter.
Because the amount entered on Form 8974, line 8,
included social security tax for your clients’ employees,
you must make an adjustment to the amount reported on
Form 8974, line 11.
Adjustment if you transferred liability. If you
transferred the liability for the employer’s share of social
security tax to the employer (client), you must reduce the
amount reported on Form 8974, line 11, by the amount of
social security tax included on Form 941, line 8. Don’t just
subtract the amount reported on Form 941, line 8,
because that line includes both social security tax and
Medicare tax.
If you received a Section 3121(q) Notice and Demand for
tax due on unreported tips (Letter 3263 or Letter 4520)
during the quarter, you report the amount for the
employer’s share of social security tax and Medicare tax
on Form 941, line 5f. Letter 3263 or Letter 4520 includes
an attachment that shows the employer’s share of social
security tax. You must add the employer’s share of social
security tax to the amount reported on Form 8974, line 11.
-4-
Instructions for Form 8974 (Rev. 12-2023)
here on your Form 8974 for that subsequent year because
this portion of the credit can be applied against the
employer social security tax paid in all four quarters of that
subsequent year. The instructions next explain the
adjustment in two situations: (1) you're claiming the credit,
but you don’t have a credit carryforward from a prior year;
and (2) you’re claiming the credit in a subsequent year
based on an election in that subsequent year with a credit
carryforward from a prior year.
Line 11 (before considering a Section 3121(q) Notice and
Demand)
+ Employer’s share of social security tax from Letter 3263 or
Letter 4520
= Final amount to enter on line 11
Example. You entered $12,400 on Form 8974, line 8,
and $6,200 on line 9. Line 10 was $18,600. 50% of line 10
is $9,300, but you also reported an amount on Form 941,
line 5f, because you received Letter 3263. Letter 3263
showed unreported tips of $20,000 and tax due of $1,530.
The attachment to Letter 3263 listed your liability for tax on
unreported tips as follows.
First year claiming the credit or subsequent year
claiming the credit but without a credit carryforward
from a prior year.
Steps to determine the amount to report on Form
8974, line 11.
Employer’s share of social security tax: $1,240
Employer’s share of Medicare tax: $290
•
1. Determine the amount of social security tax
reported on Form 8974, line 10, attributable to each
quarter of the year that is reported in the calendar year
box at the top of Form 8974 and enter these amounts in
the table below in column (b). Multiply each quarter’s
social security tax by 50% (0.50) and enter the amounts in
column (c).
•
You must add $1,240 (employer’s share of social security
tax from Letter 3263) to $9,300 (50% of the amount
reported on line 10) and enter $10,540 on line 11.
Line 11 Adjustment for Filers of Form 943 or 944
Employers who report their payroll taxes on an annual
basis (Forms 943 and 944) may need to adjust the
amount reported on Form 8974, line 11, because the
qualified small business payroll tax credit for increasing
research activities can’t be claimed until the first calendar
quarter that begins after the date on which you file your
income tax return that makes the election to take the credit
against payroll taxes. The amount reported on Form 8974,
line 10, is the total amount of social security tax (both
employer and employee share) for the whole year, but you
can only apply this portion of the credit against the
employer share of social security tax paid in calendar
quarters that began after the date on which you filed your
income tax return making the election. You can’t apply the
credit against the employer share of social security tax
paid in any calendar quarter that began before the date on
which you filed your income tax return making the
election. You may therefore need to adjust the amount you
report on Form 8974, line 11, to be 50% of the total social
security tax that you paid in the quarters after the income
tax return making the election was filed. However, as
discussed later, the credit or any previous credit carried
forward is first taken against the employer share of social
security tax up to $250,000 per quarter, then any
(d) Amount
(c) Multiply
from column
(b) Social
security tax
(a) Quarter
column (b) by (c) to include
50% (0.50)
on Form 8974,
line 11
First (Jan. 1–
Mar. 31)
Second (Apr. 1–
June 30)
Third (July 1–
Sept. 30)
Fourth (Oct. 1–
Dec. 31)
Total
2. Determine when the election was made (that is, the
date that you filed your income tax return as reported on
Form 8974, Part 1, column (c)).
3. Enter in column (d) the amounts from column (c) for
the quarters that began after the date determined above in
Step 2. Add the amounts in column (d), and enter the total
on Form 8974, line 11.
remaining elected credit or any previous credit carried
forward is taken against the employer share of Medicare
tax, and then any unused credit is available to be carried
forward to the next quarter.
Form 943 example (first year claiming the credit).
You filed your 2023 income tax return based on a calendar
year (January 1–December 31) on April 15, 2024. You
elected to take a $100,000 payroll tax credit for increasing
research activities on the Form 6765 that you filed with
your 2023 income tax return. You’ll claim the payroll tax
credit on your 2024 Form 943 that you file in January
2025. In January 2025, you prepare your 2024 Form 943
and Form 8974 to take the payroll credit. The amount you
figured on Form 8974, line 10, for total social security tax
paid in 2024 is $80,000. Following Step 1 above, you
determine the following social security tax breakdown by
quarter.
When filing Form 943 or Form 944 and claiming the
payroll tax credit, you’ll need to adjust the amount you
report on line 11 if it is the first year claiming the credit, or
a subsequent year claiming the credit and the income tax
return electing the credit was filed on any date in the first 3
quarters of the calendar year (that is, January 1–
September 30). In contrast, if you made the election on an
income tax return filed in the fourth quarter of the year
(October 1–December 31), you can't claim the credit until
the first quarter of the subsequent year on your
employment tax return for that subsequent year, and you
won’t need to make the adjustment for line 11 described
Instructions for Form 8974 (Rev. 12-2023)
-5-
(d) Amount
(d) Amount
(c) Multiply
from column
(c) Multiply
from column
(b) Social
security tax
(b) Social
security tax
(a) Quarter
column (b) by (c) to include
(a) Quarter
column (b) by (c) to include
50% (0.50)
on Form 8974,
line 11
50% (0.50)
on Form 8974,
line 11
First (Jan. 1–
Mar. 31)
$12,000
$6,000
First (Jan. 1–
Mar. 31)
Second (Apr. 1– $18,000
June 30)
$9,000
Second (Apr. 1–
June 30)
Third (July 1–
Sept. 30)
$25,000
$12,500
$12,500
$40,000
$12,500
$12,500
$25,000
Third (July 1–
Sept. 30)
Fourth (Oct. 1– $25,000
Dec. 31)
Fourth (Oct. 1–
Dec. 31)
Total
$80,000
Total
For purposes of Step 2, your income tax return was
filed on April 15, 2024. In Step 3, you enter in column (d)
the amounts from column (c) for the quarters that began
after April 15: $12,500 for the third quarter and $12,500 for
the fourth quarter. You add the amounts in column (d) and
you enter the total, $25,000, on Form 8974, line 11. In this
example, you'll also have $75,000 of credit remaining that
will be used against the employer share of Medicare tax
applicable to the third and fourth quarters. Any remaining
credit, after reducing the employer share of social security
tax and the employer share of Medicare tax, is then
carried forward to your 2025 Form 943.
Subsequent year claiming the credit with a credit
carryforward from a prior year. Determine if you’re
carrying forward any remaining credit from a prior year. If
this is the first year that you’re claiming the credit, you
don’t have any carryforward. If this isn’t the first year that
you’re claiming the credit, the amount of carryforward
remaining is reported on Form 8974, Part 1, column (g), of
your current Form 8974. However, don’t count any amount
from a new election as a carryforward from a prior year.
The amount carried forward from the prior calendar year is
available to use against the employer share of social
security tax paid in the first calendar quarter of the current
year and subsequent quarters, because the first calendar
quarter began after the date on which you filed your
income tax return for the prior year. However, the amounts
claimed in the current calendar year for an election made
on an income tax return filed in the current year may only
be used against the employer share of social security tax
paid in calendar quarters that began after the date on
which you filed your income tax return as explained earlier.
2. Add the amounts in column (c) until you reach the
amount of the credit carried forward from the prior year
and enter these amounts in column (d). For this step, don’t
include in column (d) more than the amount of the credit
that you carried forward.
3. For the credit claimed in the current year, determine
when the election was made (that is, the date that you
filed your income tax return as reported on Form 8974,
Part 1, column (c)).
4. For the quarters that began after the date
determined above in Step 3, enter in column (d) any
amounts in column (c) not previously used. Add the
amounts in column (d), and enter the total on Form 8974,
line 11. If the amounts you figured in Step 2 carry forward
into the same quarter as the amounts you figure in Step 4,
you should include both amounts in that quarter’s total in
column (d).
Form 943 example (subsequent year claiming the
credit with a credit carryforward from a prior year).
Continuing with the previous example, you use $20,000 of
$75,000 credit remaining against the employer share of
Medicare tax applicable to the third and fourth quarters of
2024. The remaining $55,000 credit, after reducing the
employer share of social security tax and the employer
share of Medicare tax, is carried forward to your 2025
Form 943. You filed your 2024 income tax return based on
a calendar year (January 1–December 31) on April 15,
2025. You elected to take a $200,000 payroll tax credit for
increasing research activities on the Form 6765 that you
filed with your 2024 income tax return. You’ll claim the
payroll tax credit on your 2025 Form 943 that you file in
January 2026. In January 2026, you prepare your 2025
Form 943 and Form 8974 to take the payroll credit. The
amount on Form 8974, line 7, is $255,000 ($55,000
carried forward from 2024, and $200,000 for 2025). The
amount you figured on Form 8974, line 10, for total social
security tax paid in 2025 is $400,000.
Steps to determine the amount to report on Form
8974, line 11.
1. Determine the amount of social security tax
reported on Form 8974, line 10, attributable to each
quarter of the year that is reported in the calendar year
box at the top of Form 8974 and enter these amounts in
the table below in column (b). Multiply each quarter’s
social security tax by 50% (0.50) and enter the amounts in
column (c).
Following Step 1 above, you determine the following
breakdown by quarter and enter the amounts in columns
(b) and (c).
-6-
Instructions for Form 8974 (Rev. 12-2023)
increasing research activities. Also, you can’t enter the
amount from Form 941, line 5c, column 2; or Form 943,
line 5, on line 14 of any of the Forms 8974 that are
attached to the aggregate Form 941 or 943. This portion
of the credit is based on each employer’s liability for
Medicare tax. Therefore, you must enter on line 14 of each
client’s Form 8974 the amount that the client would’ve
reported on Form 941, line 5c, column 2; or Form 943,
line 5, if the client filed its own Form 941 or 943. See
Line 15 Adjustment for Filers of Form 943 or 944, later, for
additional adjustments you may need to make if you file
Form 943.
(d) Amount
(c) Multiply
from column
(b) Social
(a) Quarter
column (b) by (c) to include
security tax
50% (0.50)
$40,000
$45,000
$50,000
$65,000
$200,000
on Form 8974,
line 11
First (Jan. 1–
Mar. 31)
$80,000
$40,000
$15,000
$50,000
$65,000
$170,000
Second (Apr. 1– $90,000
June 30)
Third (July 1–
Sept. 30)
$100,000
Fourth (Oct. 1– $130,000
Dec. 31)
Line 15
Total
$400,000
Multiply line 14 by 50% (0.50). The amount of qualified
small business payroll tax credit for increasing research
activities that can be used against the employer's share of
Medicare tax is limited to the amount of the employer's
share of Medicare tax reported on Form 941, 943, or 944.
The amount on line 14 is the total amount of Medicare tax
(both the employer and employee share), so you must
multiply line 14 by 50% to limit the credit to the employer’s
share of Medicare tax.
Following Step 2, you add the amounts in column (c)
until you reach the amount of the credit carried forward
from the prior year ($55,000 ($40,000 and $15,000)) and
you enter these amounts in column (d). Your carryforward
credit of $55,000 is now completely used up. For
purposes of Step 3, your income tax return was filed on
April 15, 2025. In Step 4, for the quarters that began after
the date determined earlier in Step 3 (third and fourth
quarters), enter in column (d) any amounts in column (c)
not previously used ($50,000 and $65,000). You add the
amounts in column (d) and you enter the total, $170,000,
on Form 8974, line 11. Your total payroll tax credit for 2025
is $170,000 ($55,000 carried forward from your 2024
Form 8974 and $115,000 from your 2025 Form 8974). In
this example, you'll also have $85,000 of credit remaining
that will be used against the employer share of Medicare
tax applicable to the third and fourth quarters. Any
remaining credit, after reducing the employer share of
social security tax and the employer share of Medicare
tax, is then carried forward to your 2026 Form 943.
If you file Form 943 or 944, don't multiply line 14
by 50%. Instead, see Line 15 Adjustment for Filers
!
CAUTION
of Form 943 or 944, later. If you’re a third-party
payer of sick pay or you received a Section 3121(q) Notice
and Demand, check the applicable box on line 11 and see
the instructions next.
Third-Party Payers of Sick Pay
If you’re a third-party payer of sick pay that files
Form 944, you can follow the directions below by
substituting references to Form 941, line 8, with
TIP
Form 944, line 6; and Form 941, line 5c, column 2, with
Form 944, line 4c, column 2.
Line 12
This portion of the qualified small business payroll tax
credit for increasing research activities is used against the
employer’s share of Medicare tax on wages paid to your
employees. Because the amount entered on Form 8974,
line 14, included Medicare tax for your clients’ employees,
you must make an adjustment to the amount reported on
Form 8974, line 15.
Adjustment if you transferred liability. If you
transferred the liability for the employer's share of
Medicare tax to the employer (client), you must reduce the
amount reported on Form 8974, line 15, by the amount of
Medicare tax included on Form 941, line 8. Don't just
subtract the amount reported on Form 941, line 8,
because that line includes both social security tax and
Medicare tax.
Enter the smaller of line 7 or 11, but not more than
$250,000 per quarter (Form 943 or 944 not more than $1
million per year). If you entered the amount from line 7,
stop here and also enter this amount on Form 941,
line 11a; Form 943, line 12a; or Form 944, line 8a. This is
the total credit against the employer share of social
security tax. If line 12 is less than line 7, see the
instructions for lines 13–17. Any remaining elected credit
or any previous credit carried forward is taken against the
employer share of Medicare tax, and then any unused
credit is carried forward to the next quarter (Form 941) or
year (Form 943 or 944).
Line 13
Subtract line 12 from line 7. Enter the result on line 13.
Line 15 (before considering Form 941, line 8)
− Amount of Medicare tax included on Form 941, line 8
Line 14
Enter the amount from Form 941, line 5c, column 2; Form
943, line 5; or Form 944, line 4c, column 2. This is the total
amount of Medicare tax on wages.
= Final amount to enter on line 15
If you’re filing an aggregate Form 941 or 943, you
Example. You entered $2,900 on Form 8974, line 14.
50% of line 14 is $1,450. However, this amount must be
adjusted because you reported $6,120 ($4,960 of social
must file a Form 8974 for each client that is taking
!
CAUTION
the qualified small business payroll tax credit for
Instructions for Form 8974 (Rev. 12-2023)
-7-
security tax and $1,160 of Medicare tax) on Form 941,
line 8. You must subtract $1,160 (amount of Medicare tax
reported on Form 941, line 8) from $1,450 (50% of the
amount reported on line 14) and enter $290 on line 15.
Adjustment if you didn’t transfer liability. If you didn't
transfer the liability for the employer's share of Medicare
tax to the employer (client) and you paid the employer
Medicare tax on the third-party sick pay that you paid on
behalf of the client, you must reduce the amount reported
on line 15 by any employer Medicare tax (included on
Form 941, line 5c, column 2) that was for the employees of
the client.
You must add $290 (employer’s share of Medicare tax
from Letter 3263) to $2,175 (50% of the amount reported
on line 14) and enter $2,465 on line 15.
Line 15 Adjustment for Filers of Form 943 or 944
If you had credit remaining after reducing the employer
share of social security tax, that remaining credit goes
against the employer share of Medicare tax. Employers
who report their payroll taxes on an annual basis (Forms
943 and 944) may need to adjust the amount reported on
Form 8974, line 15, because the qualified small business
payroll tax credit for increasing research activities can't be
claimed until the first calendar quarter that begins after the
date on which you file your income tax return that makes
the election to take the credit against payroll taxes. The
amount reported on Form 8974, line 14, is the total
amount of Medicare tax (both employer and employee
share) for the whole year, but you can only apply this
portion of the credit against the employer share of
Line 15 (before adjustment for third-party sick pay)
– Amount of employer’s share of Medicare tax (on wages paid to
clients’ employees) included on Form 941, line 5c, column 2
= Final amount to enter on line 15
Medicare tax paid in calendar quarters that began after
the date on which you filed your income tax return making
the election. You can't apply the credit against the
Example. You entered $2,900 on Form 8974, line 14.
50% of line 14 is $1,450. However, this amount must be
adjusted because the amount from Form 941, line 5c,
column 2, that was entered on line 14 included the
employer’s share of Medicare tax that you paid for the
wages paid to your client’s employees. There isn’t a line
on Form 941 that can assist in this calculation but you
must still determine the amount of Form 941, line 5c,
column 2, that was for wages paid to your client’s
employees. For purposes of this example, if you determine
that $1,150 of the employer’s Medicare tax included on
Form 941, line 5c, column 2, was attributable to your
client’s employees, you must subtract $1,150 from $1,450
(50% of the amount reported on line 14) and enter $300
on line 15.
employer share of Medicare tax paid in any calendar
quarter that began before the date on which you filed your
income tax return making the election. You may therefore
need to adjust the amount you report on Form 8974,
line 15, to be 50% of the total Medicare tax that you paid
in the quarters after the income tax return making the
election was filed. To make this adjustment, you can use
column (b) with Medicare tax and substituting references
to Form 8974, line 10, with Form 8974, line 14, and
references to Form 8974, line 11, with Form 8974, line 15.
Line 16
Enter the smaller of line 13 or 15. This is the total credit
against the employer share of Medicare tax.
Section 3121(q) Notice and Demand
If you received a Section 3121(q) Notice and Demand for
tax due on unreported tips (Letter 3263 or Letter 4520)
during the quarter, you report the amount for the
employer’s share of social security tax and Medicare tax
on Form 941, line 5f. Letter 3263 or Letter 4520 includes
an attachment that shows the employer’s share of
Medicare tax. You must add the employer’s share of
Medicare tax to the amount reported on Form 8974,
line 15.
Line 17
Add lines 12 and 16. Also, enter this amount on Form 941,
line 11a; Form 943, line 12a; or Form 944, line 8a. This is
the total qualified small business payroll tax credit for
increasing research activities.
Paperwork Reduction Act Notice. We ask for the
information on Form 8974 to carry out the Internal
Revenue laws of the United States. You’re required to give
us the information. We need it to ensure that you’re
complying with these laws and to allow us to figure and
collect the right amount of tax.
Line 15 (before considering a Section 3121(q) Notice and
Demand)
+ Employer’s share of Medicare tax from Letter 3263 or Letter
4520
= Final amount to enter on line 15
You’re not required to provide the information requested
on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number.
Books or records relating to a form or its instructions must
be retained as long as their contents may become
material in the administration of any Internal Revenue law.
Generally, tax returns and return information are
Example. You entered $4,350 on Form 8974, line 14.
50% of line 14 is $2,175, but you also reported an amount
on Form 941, line 5f, because you received Letter 3263.
Letter 3263 showed unreported tips of $20,000 and tax
due of $1,530. The attachment to Letter 3263 listed your
liability for tax on unreported tips as follows.
confidential, as required by Code section 6103.
The time needed to complete and file Form 8974 will
vary depending on individual circumstances. The
estimated average time is:
Employer’s share of social security tax: $1,240
Employer’s share of Medicare tax: $290
•
•
-8-
Instructions for Form 8974 (Rev. 12-2023)
you can write to the Internal Revenue Service, Tax Forms
and Publications Division, 1111 Constitution Ave. NW,
IR-6526, Washington, DC 20224. Don't send Form 8974
to this address. Instead, see Where Should You File? in
the Instructions for Form 941 or the Instructions for Form
944; or see Where To File in the Instructions for Form 943.
Recordkeeping .
Learning about the law or the form.
Preparing and sending the form to the IRS
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
45 min.
1 hr.
1 hr.
If you have comments concerning the accuracy of
these time estimates or suggestions for making Form
8974 simpler, we would be happy to hear from you. You
Instructions for Form 8974 (Rev. 12-2023)
-9-