PDF document

- 1 -

Userid: CPM Schema: Leadpct: 100% Pt. size: 10 Draft Ok to Print
instrx
AH XSL/XML Fileid: … orm-8974/202412/a/xml/cycle06/source (Init. & Date) _______

Page 1 of 9 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Instructions for Form 8974

(Rev. December 2024)
Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Section references are to the Internal Revenue Code activities that you can claim on Forms 941, 943, or 944.
unless otherwise noted. These filers will also have the option to file the related
forms such as the corresponding non-English language
Future Developments forms for all forms within the related series.
For the latest information about developments related to
Where authority is granted for any form, it is also
Form 8974 and its instructions, such as legislation
effective for related forms such as the corresponding
enacted after they were published, go to IRS.gov/
non-English language form. For example, Form 8974 can
Form8974.
be used to provide authorization for Form 941 (sp) using
Reminders the entry spaces for Form 941.

The qualified small business payroll tax credit for in- Who Must File Form 8974?
creasing research activities has increased and been You must file Form 8974 and attach it to Form 941, 943, or
modified. For tax years beginning before January 1, 944 if you made an election on your income tax return to
2023, a qualified small business may elect to claim up to claim the qualified small business payroll tax credit for
$250,000 of its credit for increasing research activities as increasing research activities against your payroll taxes.
a payroll tax credit. The Inflation Reduction Act of 2022 The payroll tax credit must be elected on an original
(the IRA) increases the election amount to $500,000 for income tax return that is timely filed (including
tax years beginning after December 31, 2022. The payroll extensions). The election is made on Form 6765. If you
tax credit election must be made on or before the due date haven’t filed the income tax return making the election to
of the originally filed income tax return (including claim the payroll tax credit on Form 6765, you can’t file
extensions). The portion of the credit used against payroll Form 8974 and can’t claim the qualified small business
taxes is allowed in the first calendar quarter beginning payroll tax credit for increasing research activities against
after the date that the qualified small business filed its your payroll taxes on Form 941, 943, or 944.
income tax return. The election and determination of the
credit amount that will be used against the employer's You can’t claim the qualified small business
payroll taxes are made on Form 6765, Credit for ! payroll tax credit for increasing research activities
Increasing Research Activities. The amount from Form CAUTION on Form 941, 943, or 944 unless you make the
6765, line 36 (line 44 for income tax years beginning election on Form 6765 and then file Form 8974 attached
before January 1, 2024), must then be reported on Form to Form 941, 943, or 944.
8974.
Starting in the first quarter of 2023, the payroll tax credit Aggregate Form 941 or Form 943
is first used to reduce the employer share of social If you're a section 3504 agent or a certified professional
security tax up to $250,000 per quarter and any remaining employer organization (CPEO), you must complete
credit reduces the employer share of Medicare tax for the Schedule R (Form 941), Allocation Schedule for
quarter. Any remaining credit, after reducing the employer Aggregate Form 941 Filers, when filing an aggregate Form
share of social security tax and the employer share of 941, or Schedule R (Form 943), Allocation Schedule for
Medicare tax, is then carried forward to the next quarter. Aggregate Form 943 Filers, when filing an aggregate Form
For more information about the payroll tax credit, go to 943. Other third-party payers that file an aggregate Form
IRS.gov/ResearchPayrollTC. 941 or 943, such as non-certified PEOs, must complete
and file Schedule R if they have clients that are claiming
Forms in Spanish. Many forms and instructions the qualified small business payroll tax credit for
discussed in these instructions have Spanish-language increasing research activities. For you to claim the credit,
versions available for employers and employees. Some your client must be a qualified small business and must
examples include Form 941 (sp), Form 943 (sp), and Form elect to apply the research credit against payroll tax
944 (sp). Although these instructions don't reference liability by attaching Form 6765 to its timely filed income
Spanish-language forms and instructions in each instance tax return. Additionally, you must attach a Form 8974 for
that one is available, you can see Pub. 15 (sp) and go to each client that is taking the credit. See the instructions for
IRS.gov to determine if a Spanish-language version is Line 8 Line 9, , and Line 14, later, for more information.
available. Also, go to IRS.gov/ResearchPayrollTC for more
information.
General Instructions
Correcting Form 8974
Purpose of Form 8974 If you discover an error on a previously filed Form 8974,
Use Form 8974 to determine the amount of the qualified make the correction by filing Form 941-X, Adjusted
small business payroll tax credit for increasing research Employer's QUARTERLY Federal Tax Return or Claim for

Instructions for Form 8974 (Rev. 12-2024) Catalog Number 68750R
Dec 4, 2024 Department of the Treasury Internal Revenue Service www.irs.gov

- 2 -

Enlarge image

Page 2 of 9  Fileid: … orm-8974/202412/a/xml/cycle06/source                                 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Refund; Form 943-X, Adjusted Employer's Annual Federal                 If you’re filing Schedule R with Form 941 or Form 
Tax Return for Agricultural Employees or Claim for Refund;     !       943, the EIN entered at the top of each client’s or 
or Form 944-X, Adjusted Employer's ANNUAL Federal Tax          CAUTION customer’s Form 8974 must be the EIN of the 
Return or Claim for Refund, as applicable. Attach a            client or customer.
corrected Form 8974 to your amended return. For more 
information, see the instructions for Form 941-X, 943-X, or    Calendar Year
944-X.                                                         Enter the calendar year as shown on the attached Form 
When Must You File?                                            941, 943, or 944.

                                                               Check the Box for the Quarter (Forms 
Quarterly Form 941 Filers
You can first claim the qualified small business payroll tax   941 Series Only)
credit for increasing research activities on the Form 941      Under Report for this quarter at the top of Form 8974, 
for the quarter that begins after you file your income tax     check the appropriate box of the quarter for which you’re 
return that makes the election on Form 6765. The Form          filing Form 8974. The quarter must match the quarter as 
941 for that quarter is the Form 941 on which you’re           shown on Form 941. Check only one box.
required to claim the credit. You can’t claim the credit 
related to this election on a different quarter’s Form 941     Part 1: Tell Us About Your Income Tax 
unless it is to take a carryforward credit from the required   Return
quarter, as determined on Form 8974.
  Example for Form 941 filers.  If you file your 2024          Lines 1–5
income tax return based on a calendar year (January 1–         The payroll tax credit election on Form 6765 is limited to 5 
December 31) on March 17, 2025, the 2025 second                tax years (including if members of your controlled group 
quarter (April 1, 2025–June 30, 2025) Form 941, which is       previously made the election). Use lines 1–5 to report the 
filed by July 31, 2025, is the first quarter that you can take credit from each tax year. Enter the income tax years in 
the qualified small business payroll tax credit for            chronological order with the earliest year entered on 
increasing research activities.                                line 1. You must continue to report each income tax year 
                                                               election until the remaining credit (column (g)) for the 
Annual Form 943 or 944 Filers                                  income tax year reaches zero.
You can first claim the qualified small business payroll tax 
credit for increasing research activities on the Form 943 or   Column (a)
944 for the year that includes the quarter that begins after 
you file your income tax return that makes the election on     Enter the ending date of your income tax period. Enter the 
Form 6765. The Form 943 or 944 for the year that includes      date as “MM/DD/YYYY.” For example, if your 2024 income 
that quarter is the Form 943 or 944 on which you’re            tax return was for a calendar year, enter “12/31/2024.” If 
required to claim the credit. You can’t claim the credit       your income tax return was for a fiscal year that ended on 
related to this election on a Form 943 or 944 for a different  June 30, 2024, enter “06/30/2024.”
year unless it is to take a carryforward credit from the 
required year, as determined on Form 8974.                     Column (b)
  Example for Form 943 or 944 Filers. If you filed your 
2024 income tax return based on a calendar year                Tell us which income tax return you filed that elected a 
(January 1–December 31) on March 17, 2025, the 2025            qualified small business payroll tax credit on Form 6765. 
second quarter (April 1, 2025–June 30, 2025) is the first      Form 6765 can be attached to Form 1040, 1065, 1120, 
quarter that you can take the qualified small business         1120-F, or 1120-S.
payroll tax credit for increasing research activities. 
Therefore, the 2025 Form 943 or 944, which is filed by         Column (c)
February 2, 2026, is the first year on which you can claim 
the credit.                                                    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, “03/17/2025”).
Specific Instructions
Enter Your Business Information                                Column (d)

Enter your employer identification number (EIN) and name       If the EIN used on Form 8974 isn’t the same as the EIN 
at the top of Form 8974. Make sure that they exactly           used on Form 6765, enter the EIN that was used on Form 
match the name of your business and the EIN that the IRS       6765. Generally, the EIN used on Form 8974 should be 
assigned to your business and also match the name and          the same as the EIN used on Form 6765. However, if 
EIN shown on Form 941, 943, or 944. Also check a box to        you’re a member of a controlled group of corporations (as 
tell us on which form you'll take the credit from Part 2,      defined in sections 41(f)(1)(A) and (f)(5)) or a member of a 
line 12 or, if applicable, line 17. Check only one box.        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.

2                                                                               Instructions for Form 8974 (Rev. 12-2024)

- 3 -

Enlarge image

Page 3 of 9 Fileid: … orm-8974/202412/a/xml/cycle06/source 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Column (e) second quarter of 2025) but now you must also enter
$75,000 in column (f) because this is the amount of the
Generally, enter the amount from Form 6765, line 36 credit from column (e) that you claimed in a previous
(line 44 for income tax years beginning before January 1, period. You’ll enter $25,000 in column (g), which is your
2024). However, if you’re a member of a controlled group carryforward from the prior quarter.
of corporations (as defined in sections 41(f)(1)(A) and (f) The discussion under Carryforward above also
(5)) or a member of a group of trades or businesses under TIP applies to Forms 943 and 944. However, the
common control (as defined in section 41(f)(1)(B) and remaining credit from 1 year is carried forward to
Regulations section 1.41-6(a)(3)(ii)), enter the amount of the following year.
the credit that was allocated to your EIN. As a member,
your credit is determined on a proportionate basis to your Additional years. If you claim the payroll tax credit on
share of the aggregate qualified research expenses for Form 6765 on an additional year's income tax return, you’ll
increasing research activities taken into account by the enter the additional payroll tax credit using the additional
group for the research credit. The amount entered in rows in Part 1, with the earliest year entered on line 1.
column (e) may not exceed $250,000 for each income tax There are five rows in Part 1 because the payroll tax credit
year beginning before January 1, 2023. For each income election is limited to 5 tax years. While the amount you
tax year beginning after December 31, 2022, the amount enter in column (e) may not exceed $250,000 per row for
entered in column (e) may not exceed $500,000. each income tax year beginning before January 1, 2023,
and $500,000 for each income tax year beginning after
Column (f) December 31, 2022, the total amount entered on line 6,
column (g), and line 7 may exceed $500,000 if you
Enter the amount of the credit from column (e) that was claimed the credit in multiple years and you're still carrying
taken in a previous period or previous periods. forward unused credit from earlier years.

Part 2: Determine the Credit That You
Column (g)
Can Use This Period
Subtract column (f) from column (e) and enter the result in
column (g). Add all of the amounts in column (g) of lines Line 7
1–5, and enter the result on line 6, column (g). This is the Enter the amount from Part 1, line 6, column (g).
total amount of credit you have available for the current
quarter (Form 941) or year (Form 943 or 944). Line 8
Carryforward. If the qualified small business payroll tax Enter the amount from Form 941, line 5a, column 2; Form
credit for increasing research activities reported in column 943, line 3; or Form 944, line 4a, column 2. This is the total
(e) can’t be fully used in the first quarter after the income amount of social security tax on wages.
tax return is filed because it was limited to the amount of If you’re filing an aggregate Form 941 or 943, you
the employer share of social security tax (and the ! must file a Form 8974 for each client that is taking
employer share of Medicare tax for quarters beginning CAUTION the qualified small business payroll tax credit for
after December 31, 2022) on the wages of your increasing research activities. Also, you can’t enter the
employees for the quarter, you can carry forward any amount from Form 941, line 5a, column 2; or Form 943,
unused amount to the next quarter. If, in the next quarter line 3, on line 8 of any of the Forms 8974 that are attached
the amount carried over from the first quarter can’t be fully to the aggregate Form 941 or 943. This portion of the
used, then you can carry forward any unused amount to credit is based on each employer’s liability for social
subsequent quarters. security tax. Therefore, you must enter on line 8 of each
Example. You elected to take $100,000 as a qualified client’s Form 8974 the amount that the client would’ve
small business payroll tax credit for increasing research reported on Form 941, line 5a, column 2; or Form 943,
activities when you filed your 2024 income tax return on line 3, if the client filed its own Form 941 or 943. See
March 17, 2025. On the Form 8974 that you attach to your Line 11 Adjustment for Filers of Form 943 or 944, later, for
second quarter 2025 Form 941, you enter $100,000 in additional adjustments you may need to make if you file
column (e), leave column (f) blank because the second Form 943.
quarter of 2025 is the first time you’re using the elected
amount from your 2024 income tax return, and enter Line 9
$100,000 in column (g). You complete lines 7–17 and Enter the amount from Form 941, line 5b, column 2; or
learn that you can only use $75,000 of the credit for the Form 944, line 4b, column 2. This is the total amount of
second quarter of 2025. You have a $25,000 carryforward social security tax on tips.
to the third quarter of 2025.
If you’re filing an aggregate Form 941, you must
On the Form 8974 that you attach to your third quarter ! file a Form 8974 for each client that is taking the
2025 Form 941, you’ll enter on line 1, columns (a)–(d), the CAUTION qualified small business payroll tax credit for
same information (your 2024 income tax return increasing research activities. Also, you can’t enter the
information) that you reported on the previously filed Form amount from Form 941, line 5b, column 2, on line 9 of any
8974, line 1, columns (a)–(d) (the Form 8974 that you of the Forms 8974 that are attached to the aggregate
attached to your second quarter 2025 Form 941). You’ll Form 941. This portion of the credit is based on each
enter $100,000 in column (e) (same as you did for the

Instructions for Form 8974 (Rev. 12-2024) 3

- 4 -

Enlarge image

Page 4 of 9 Fileid: … orm-8974/202412/a/xml/cycle06/source 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

employer’s liability for social security tax. Therefore, you reported on Form 941, line 8) from $6,200 (50% of the
must enter on line 9 of each client’s Form 8974 the amount reported on line 10) and enter $1,240 on line 11.
amount that the client would’ve reported on Form 941,
Adjustment if you didn’t transfer liability. If you didn’t
line 5b, column 2, if the client filed its own Form 941.
transfer the liability for the employer’s share of social
security tax to the employer (client) and you paid the
Line 10 employer social security tax on the third-party sick pay
Add lines 8 and 9. Enter the result on line 10. that you paid on behalf of the client, you must reduce the
amount reported on line 11 by any employer social
Line 11 security tax (included on Form 941, line 5a, column 2) that
Multiply line 10 by 50% (0.50). The first $250,000 of the was for the employees of the client.
qualified small business payroll tax credit for increasing
Line 11 (before adjustment for third-party sick pay)
research activities can only be used against the
– Amount of employer's share of social security tax (on wages paid to
employer’s share of social security tax reported on Form clients’ employees) included on Form 941, line 5a, column 2
941, 943, or 944. The amount on line 10 is the total
amount of social security tax (both the employer and = Final amount to enter on line 11
employee share), so you must multiply line 10 by 50% to
limit the credit to the employer’s share of social security
tax. Example. You entered $12,400 on Form 8974, line 8,
and zero on line 9. Line 10 was also $12,400. 50% of
If you file Form 943 or 944, don't multiply line 10 line 10 is $6,200. However, this amount must be adjusted
! by 50%. Instead, see Line 11 Adjustment for Filers because the amount from Form 941, line 5a, column 2,
CAUTION of Form 943 or 944, later. If you’re a third-party
that was entered on line 8 included the employer’s share
payer of sick pay or you received a Section 3121(q) Notice of social security tax that you paid for the wages paid to
and Demand, check the applicable box on line 11 and see your client’s employees. There isn’t a line on Form 941
the instructions next. that can assist in this calculation but you must still
determine the amount of Form 941, line 5a, column 2, that
Third-Party Payers of Sick Pay was for wages paid to your client’s employees. For
purposes of this example, if you determine that $5,000 of
If you’re a third-party payer of sick pay that files the employer’s social security tax included on Form 941,
TIP Form 944, you can follow the directions below by line 5a, column 2, was attributable to your client’s
substituting references to Form 941, line 8, with employees, you must subtract $5,000 from $6,200 (50%
Form 944, line 6; and Form 941, line 5a, column 2, with of the amount reported on line 10) and enter $1,200 on
Form 944, line 4a, column 2. line 11.

You can only take up to $250,000 of the qualified small Section 3121(q) Notice and Demand
business payroll tax credit for increasing research
activities against the employer’s share of social security If you received a Section 3121(q) Notice and Demand for
tax on wages paid to your employees each quarter. tax due on unreported tips (Letter 3263 or Letter 4520)
Because the amount entered on Form 8974, line 8, during the quarter, you report the amount for the
included social security tax for your clients’ employees, employer’s share of social security tax and Medicare tax
you must make an adjustment to the amount reported on on Form 941, line 5f. Letter 3263 or Letter 4520 includes
Form 8974, line 11. an attachment that shows the employer’s share of social
security tax. You must add the employer’s share of social
Adjustment if you transferred liability. If you security tax to the amount reported on Form 8974, line 11.
transferred the liability for the employer’s share of social
security tax to the employer (client), you must reduce the
Line 11 (before considering a Section 3121(q) Notice and
amount reported on Form 8974, line 11, by the amount of Demand)
social security tax included on Form 941, line 8. Don’t just + Employer’s share of social security tax from Letter 3263 or
subtract the amount reported on Form 941, line 8, Letter 4520
because that line includes both social security tax and
Medicare tax. = Final amount to enter on line 11

Line 11 (before considering Form 941, line 8)
– Amount of social security tax included on Form 941, line 8 Example. You entered $12,400 on Form 8974, line 8,
= Final amount to enter on line 11 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
Example. You entered $12,400 on Form 8974, line 8, showed unreported tips of $20,000 and tax due of $1,530.
and zero on line 9. Line 10 was also $12,400. 50% of The attachment to Letter 3263 listed your liability for tax on
line 10 is $6,200. However, this amount must be adjusted unreported tips as follows.
because you reported $6,120 ($4,960 of social security • Employer’s share of social security tax: $1,240
tax and $1,160 of Medicare tax) on Form 941, line 8. You • Employer’s share of Medicare tax: $290
must subtract $4,960 (amount of social security tax

4 Instructions for Form 8974 (Rev. 12-2024)

- 5 -

Enlarge image

Page 5 of 9     Fileid: … orm-8974/202412/a/xml/cycle06/source                               12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

You must add $1,240 (employer’s share of social security          1. Determine the amount of social security tax 
tax from Letter 3263) to $9,300 (50% of the amount                reported on Form 8974, line 10, attributable to each 
reported on line 10) and enter $10,540 on line 11.                quarter of the year that is reported in the calendar year 
                                                                  box at the top of Form 8974 and enter these amounts in 
Line 11 Adjustment for Filers of Form 943 or 944                  the table below in column (b). Multiply each quarter’s 
                                                                  social security tax by 50% (0.50) and enter the amounts in 
Employers who report their payroll taxes on an annual             column (c).
basis (Forms 943 and 944) may need to adjust the 
amount reported on Form 8974, line 11, because the                                                        (d) Amount 
qualified small business payroll tax credit for increasing                                   (c) Multiply from column 
                                                                                 (b) Social 
research activities can’t be claimed until the first calendar     (a) Quarter                column (b) by  (c) to include 
quarter that begins after the date on which you file your                        security tax
                                                                                             50% (0.50)   on Form 8974, 
income tax return that makes the election to take the credit                                              line 11
against payroll taxes. The amount reported on Form 8974,          First (Jan. 1–
line 10, is the total amount of social security tax (both         Mar. 31)
employer and employee share) for the whole year, but you 
                                                                  Second (Apr. 1–
can only apply this portion of the credit against the             June 30)
employer share of social security tax paid in calendar 
quarters that began after the date on which you filed your        Third (July 1–
income tax return making the election. You can’t apply the        Sept. 30)
credit against the employer share of social security tax          Fourth (Oct. 1–
paid in any calendar quarter that began before the date on        Dec. 31)
which you filed your income tax return making the                 Total
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       2. Determine when the election was made (that is, the 
tax return making the election was filed. However, as             date that you filed your income tax return as reported on 
discussed later, the credit or any previous credit carried        Form 8974, Part 1, column (c)).
forward is first taken against the employer share of social       3. Enter in column (d) the amounts from column (c) for 
security tax up to $250,000 per quarter, then any                 the quarters that began after the date determined above in 
remaining elected credit or any previous credit carried           Step 2. Add the amounts in column (d), and enter the total 
forward is taken against the employer share of Medicare           on Form 8974, line 11.
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 2024 income tax return based on a calendar 
When filing Form 943 or Form 944 and claiming the                 year (January 1–December 31) on April 15, 2025. You 
payroll tax credit, you’ll need to adjust the amount you          elected to take a $100,000 payroll tax credit for increasing 
report on line 11 if it is the first year claiming the credit, or research activities on the Form 6765 that you filed with 
a subsequent year claiming the credit and the income tax          your 2024 income tax return. You’ll claim the payroll tax 
return electing the credit was filed on any date in the first 3   credit on your 2025 Form 943 that you file in January 
quarters of the calendar year (that is, January 1–                2026. In January 2026, you prepare your 2025 Form 943 
September 30). In contrast, if you made the election on an        and Form 8974 to take the payroll credit. The amount you 
income tax return filed in the fourth quarter of the year         figured on Form 8974, line 10, for total social security tax 
(October 1–December 31), you can't claim the credit until         paid in 2025 is $80,000. Following Step 1 above, you 
the first quarter of the subsequent year on your                  determine the following social security tax breakdown by 
employment tax return for that subsequent year, and you           quarter.
won’t need to make the adjustment for line 11 described 
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 4 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.
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. 

Instructions for Form 8974 (Rev. 12-2024)                                                                                      5

- 6 -

Enlarge image

Page 6 of 9 Fileid: … orm-8974/202412/a/xml/cycle06/source 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

(d) Amount (d) Amount
(c) Multiply from column (c) Multiply from column
(b) Social (b) Social
(a) Quarter column (b) by (c) to include (a) Quarter column (b) by (c) to include
security tax security tax
50% (0.50) on Form 8974, 50% (0.50) on Form 8974,
line 11 line 11
First (Jan. 1– $12,000 $6,000 First (Jan. 1–
Mar. 31) Mar. 31)
Second (Apr. 1– $18,000 $9,000 Second (Apr. 1–
June 30) June 30)
Third (July 1– $25,000 $12,500 $12,500 Third (July 1–
Sept. 30) Sept. 30)
Fourth (Oct. 1– $25,000 $12,500 $12,500 Fourth (Oct. 1–
Dec. 31) Dec. 31)
Total $80,000 $40,000 $25,000 Total

For purposes of Step 2, your income tax return was 2. Add the amounts in column (c) until you reach the
filed on April 15, 2025. In Step 3, you enter in column (d) amount of the credit carried forward from the prior year
the amounts from column (c) for the quarters that began and enter these amounts in column (d). For this step, don’t
after April 15: $12,500 for the third quarter and $12,500 for include in column (d) more than the amount of the credit
the fourth quarter. You add the amounts in column (d) and that you carried forward.
you enter the total, $25,000, on Form 8974, line 11. In this 3. For the credit claimed in the current year, determine
example, you'll also have $75,000 of credit remaining that when the election was made (that is, the date that you
will be used against the employer share of Medicare tax filed your income tax return as reported on Form 8974,
applicable to the third and fourth quarters. Any remaining Part 1, column (c)).
credit, after reducing the employer share of social security
4. For the quarters that began after the date
tax and the employer share of Medicare tax, is then
determined above in Step 3, enter in column (d) any
carried forward to your 2026 Form 943.
amounts in column (c) not previously used. Add the
Subsequent year claiming the credit with a credit amounts in column (d), and enter the total on Form 8974,
carryforward from a prior year. Determine if you’re line 11. If the amounts you figured in Step 2 carry forward
carrying forward any remaining credit from a prior year. If into the same quarter as the amounts you figure in Step 4,
this is the first year that you’re claiming the credit, you you should include both amounts in that quarter’s total in
don’t have any carryforward. If this isn’t the first year that column (d).
you’re claiming the credit, the amount of carryforward
remaining is reported on Form 8974, Part 1, column (g), of Form 943 example (subsequent year claiming the
your current Form 8974. However, don’t count any amount credit with a credit carryforward from a prior year).
from a new election as a carryforward from a prior year. Continuing with the previous example, you use $20,000 of
The amount carried forward from the prior calendar year is $75,000 credit remaining against the employer share of
available to use against the employer share of social Medicare tax applicable to the third and fourth quarters of
security tax paid in the first calendar quarter of the current 2025. The remaining $55,000 credit, after reducing the
year and subsequent quarters, because the first calendar employer share of social security tax and the employer
quarter began after the date on which you filed your share of Medicare tax, is carried forward to your 2026
income tax return for the prior year. However, the amounts Form 943. You filed your 2025 income tax return based on
claimed in the current calendar year for an election made a calendar year (January 1–December 31) on April 15,
on an income tax return filed in the current year may only 2026. You elected to take a $200,000 payroll tax credit for
be used against the employer share of social security tax increasing research activities on the Form 6765 that you
paid in calendar quarters that began after the date on filed with your 2025 income tax return. You’ll claim the
which you filed your income tax return as explained earlier. payroll tax credit on your 2026 Form 943 that you file in
January 2027. In January 2027, you prepare your 2026
Steps to determine the amount to report on Form Form 943 and Form 8974 to take the payroll credit. The
8974, line 11. amount on Form 8974, line 7, is $255,000 ($55,000
1. Determine the amount of social security tax carried forward from 2025, and $200,000 for 2026). The
reported on Form 8974, line 10, attributable to each amount you figured on Form 8974, line 10, for total social
quarter of the year that is reported in the calendar year security tax paid in 2026 is $400,000.
box at the top of Form 8974 and enter these amounts in Following Step 1 above, you determine the following
the table below in column (b). Multiply each quarter’s breakdown by quarter and enter the amounts in columns
social security tax by 50% (0.50) and enter the amounts in (b) and (c).
column (c).

6 Instructions for Form 8974 (Rev. 12-2024)

- 7 -

Enlarge image

Page 7 of 9 Fileid: … orm-8974/202412/a/xml/cycle06/source 12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

increasing research activities. Also, you can’t enter the
(d) Amount
(c) Multiply from column amount from Form 941, line 5c, column 2; or Form 943,
(b) Social
(a) Quarter column (b) by (c) to include line 5, on line 14 of any of the Forms 8974 that are
security tax attached to the aggregate Form 941 or 943. This portion
50% (0.50) on Form 8974,
line 11 of the credit is based on each employer’s liability for
First (Jan. 1– $80,000 $40,000 $40,000 Medicare tax. Therefore, you must enter on line 14 of each
Mar. 31) client’s Form 8974 the amount that the client would’ve
reported on Form 941, line 5c, column 2; or Form 943,
Second (Apr. 1– $90,000 $45,000 $15,000 line 5, if the client filed its own Form 941 or 943. See
June 30)
Line 15 Adjustment for Filers of Form 943 or 944, later, for
Third (July 1– $100,000 $50,000 $50,000 additional adjustments you may need to make if you file
Sept. 30) Form 943.
Fourth (Oct. 1– $130,000 $65,000 $65,000
Dec. 31) Line 15
Total $400,000 $200,000 $170,000 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
Following Step 2, you add the amounts in column (c) Medicare tax is limited to the amount of the employer's
until you reach the amount of the credit carried forward share of Medicare tax reported on Form 941, 943, or 944.
from the prior year ($55,000 ($40,000 and $15,000)) and The amount on line 14 is the total amount of Medicare tax
you enter these amounts in column (d). Your carryforward (both the employer and employee share), so you must
credit of $55,000 is now completely used up. For multiply line 14 by 50% to limit the credit to the employer’s
purposes of Step 3, your income tax return was filed on share of Medicare tax.
April 15, 2026. In Step 4, for the quarters that began after
the date determined earlier in Step 3 (third and fourth If you file Form 943 or 944, don't multiply line 14
quarters), enter in column (d) any amounts in column (c) ! by 50%. Instead, see Line 15 Adjustment for Filers
not previously used ($50,000 and $65,000). You add the CAUTION of Form 943 or 944, later. If you’re a third-party
amounts in column (d) and you enter the total, $170,000, payer of sick pay or you received a Section 3121(q) Notice
on Form 8974, line 11. Your total payroll tax credit for 2026 and Demand, check the applicable box on line 11 and see
is $170,000 ($55,000 carried forward from your 2025 the instructions next.
Form 8974 and $115,000 from your 2026 Form 8974). In
this example, you'll also have $85,000 of credit remaining Third-Party Payers of Sick Pay
that will be used against the employer share of Medicare If you’re a third-party payer of sick pay that files
tax applicable to the third and fourth quarters. Any TIP Form 944, you can follow the directions below by
remaining credit, after reducing the employer share of substituting references to Form 941, line 8, with
social security tax and the employer share of Medicare Form 944, line 6; and Form 941, line 5c, column 2, with
tax, is then carried forward to your 2027 Form 943. Form 944, line 4c, column 2.
Line 12 This portion of the qualified small business payroll tax
Enter the smaller of line 7 or 11, but not more than credit for increasing research activities is used against the
$250,000 per quarter (Form 943 or 944 not more than $1 employer’s share of Medicare tax on wages paid to your
million per year). If you entered the amount from line 7, employees. Because the amount entered on Form 8974,
stop here and also enter this amount on Form 941, line 11; line 14, included Medicare tax for your clients’ employees,
Form 943, line 12; or Form 944, line 8. This is the total you must make an adjustment to the amount reported on
credit against the employer share of social security tax. If Form 8974, line 15.
line 12 is less than line 7, see the instructions for lines 13– Adjustment if you transferred liability. If you
17. Any remaining elected credit or any previous credit transferred the liability for the employer's share of
carried forward is taken against the employer share of Medicare tax to the employer (client), you must reduce the
Medicare tax, and then any unused credit is carried amount reported on Form 8974, line 15, by the amount of
forward to the next quarter (Form 941) or year (Form 943 Medicare tax included on Form 941, line 8. Don't just
or 944). subtract the amount reported on Form 941, line 8,
because that line includes both social security tax and
Line 13
Medicare tax.
Subtract line 12 from line 7. Enter the result on line 13.
Line 15 (before considering Form 941, line 8)
Line 14 − Amount of Medicare tax included on Form 941, line 8
Enter the amount from Form 941, line 5c, column 2; Form = Final amount to enter on line 15
943, line 5; or Form 944, line 4c, column 2. This is the total
amount of Medicare tax on wages.
If you’re filing an aggregate Form 941 or 943, you
Example. You entered $2,900 on Form 8974, line 14.
! must file a Form 8974 for each client that is taking 50% of line 14 is $1,450. However, this amount must be
CAUTION the qualified small business payroll tax credit for
adjusted because you reported $6,120 ($4,960 of social

Instructions for Form 8974 (Rev. 12-2024) 7

- 8 -

Enlarge image

Page 8 of 9  Fileid: … orm-8974/202412/a/xml/cycle06/source                                       12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

security tax and $1,160 of Medicare tax) on Form 941,                Example. You entered $4,350 on Form 8974, line 14. 
line 8. You must subtract $1,160 (amount of Medicare tax           50% of line 14 is $2,175, but you also reported an amount 
reported on Form 941, line 8) from $1,450 (50% of the              on Form 941, line 5f, because you received Letter 3263. 
amount reported on line 14) and enter $290 on line 15.             Letter 3263 showed unreported tips of $20,000 and tax 
                                                                   due of $1,530. The attachment to Letter 3263 listed your 
Adjustment if you didn’t transfer liability.         If you didn't 
                                                                   liability for tax on unreported tips as follows.
transfer the liability for the employer's share of Medicare 
tax to the employer (client) and you paid the employer             • Employer’s share of social security tax: $1,240
Medicare tax on the third-party sick pay that you paid on          • Employer’s share of Medicare tax: $290
                                                                   You must add $290 (employer’s share of Medicare tax 
behalf of the client, you must reduce the amount reported 
                                                                   from Letter 3263) to $2,175 (50% of the amount reported 
on line 15 by any employer Medicare tax (included on 
                                                                   on line 14) and enter $2,465 on line 15.
Form 941, line 5c, column 2) that was for the employees of 
the client.                                                        Line 15 Adjustment for Filers of Form 943 or 944
Line 15 (before adjustment for third-party sick pay)               If you had credit remaining after reducing the employer 
– Amount of employer’s share of Medicare tax (on wages paid to     share of social security tax, that remaining credit goes 
clients’ employees) included on Form 941, line 5c, column 2        against the employer share of Medicare tax. Employers 
= Final amount to enter on line 15                                 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 
  Example.  You entered $2,900 on Form 8974, line 14. 
                                                                   claimed until the first calendar quarter that begins after the 
50% of line 14 is $1,450. However, this amount must be 
                                                                   date on which you file your income tax return that makes 
adjusted because the amount from Form 941, line 5c, 
                                                                   the election to take the credit against payroll taxes. The 
column 2, that was entered on line 14 included the 
                                                                   amount reported on Form 8974, line 14, is the total 
employer’s share of Medicare tax that you paid for the 
                                                                   amount of Medicare tax (both employer and employee 
wages paid to your client’s employees. There isn’t a line 
                                                                   share) for the whole year, but you can only apply this 
on Form 941 that can assist in this calculation but you 
                                                                   portion of the credit against the employer share of 
must still determine the amount of Form 941, line 5c, 
                                                                   Medicare tax paid in calendar quarters that began after 
column 2, that was for wages paid to your client’s 
                                                                   the date on which you filed your income tax return making 
employees. For purposes of this example, if you determine 
                                                                   the election. You can't apply the credit against the 
that $1,150 of the employer’s Medicare tax included on 
                                                                   employer share of Medicare tax paid in any calendar 
Form 941, line 5c, column 2, was attributable to your 
                                                                   quarter that began before the date on which you filed your 
client’s employees, you must subtract $1,150 from $1,450 
                                                                   income tax return making the election. You may therefore 
(50% of the amount reported on line 14) and enter $300 
                                                                   need to adjust the amount you report on Form 8974, 
on line 15.
                                                                   line 15, to be 50% of the total Medicare tax that you paid 
Section 3121(q) Notice and Demand                                  in the quarters after the income tax return making the 
                                                                   election was filed. To make this adjustment, you can use 
If you received a Section 3121(q) Notice and Demand for 
                                                                   the tables in the instructions for line 11 by substituting 
tax due on unreported tips (Letter 3263 or Letter 4520) 
                                                                   column (b) with Medicare tax and substituting references 
during the quarter, you report the amount for the 
                                                                   to Form 8974, line 10, with Form 8974, line 14, and 
employer’s share of social security tax and Medicare tax 
                                                                   references to Form 8974, line 11, with Form 8974, line 15.
on Form 941, line 5f. Letter 3263 or Letter 4520 includes 
an attachment that shows the employer’s share of                   Line 16
Medicare tax. You must add the employer’s share of 
                                                                   Enter the smaller of line 13 or 15. This is the total credit 
Medicare tax to the amount reported on Form 8974, 
                                                                   against the employer share of Medicare tax.
line 15.
Line 15 (before considering a Section 3121(q) Notice and           Line 17
Demand)                                                            Add lines 12 and 16. Also, enter this amount on Form 941, 
+ Employer’s share of Medicare tax from Letter 3263 or Letter      line 11; Form 943, line 12; or Form 944, line 8. This is the 
4520                                                               total qualified small business payroll tax credit for 
= Final amount to enter on line 15                                 increasing research activities.

8                                                                             Instructions for Form 8974 (Rev. 12-2024)

- 9 -

Enlarge image

Page 9 of 9  Fileid: … orm-8974/202412/a/xml/cycle06/source                       12:47 - 4-Dec-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

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.
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 confidential, as required by Code section 6103.
The time needed to complete and file Form 8974 will vary depending on individual circumstances. The estimated 
burden for employers filing Form 8974 is approved under OMB control number 1545-0029 and is included in the 
estimates shown in their employment tax return instructions.

Instructions for Form 8974 (Rev. 12-2024)                                                                                 9

PDF file checksum: 2897001491

(Plugin #1/10.13/13.0)