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AH XSL/XML Fileid: … ns/i8974/202312/a/xml/cycle05/source (Init. & Date) _______

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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 share of social security tax and the employer share of
unless otherwise noted. Medicare tax, is then carried forward to the next quarter.
For more information about the payroll tax credit, go to
Future Developments IRS.gov/ResearchPayrollTC.
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

Form8974. Purpose of Form 8974
What’s New Use Form 8974 to determine the amount of the qualified
small business payroll tax credit for increasing research
Forms 941-PR, 941-SS, 943-PR, and 944 (sp) referen- activities that you can claim on Forms 941, 943, or 944.
ces removed. Beginning with filings for tax year 2023, These filers will also have the option to file the related
former filers of Form 943-PR will instead file Form 943, forms such as the corresponding non-English language
Employer's Annual Federal Tax Return for Agricultural forms for all forms within the related series.
Employees. These filers will also have the option to file the
new Spanish-language Form 943 (sp). Form 943-PR is Where authority is granted for any form, it is also
being discontinued. Beginning with filings for the first effective for related forms such as the corresponding
quarter of 2024, former filers of Form 941-SS will instead non-English language form. For example, Form 8974 can
file Form 941, Employer’s QUARTERLY Federal Tax be used to provide authorization for Form 941 (sp) using
Return, issued in and for the first quarter of 2024. These the entry spaces for Form 941.
filers will also have the option to file the new
Spanish-language Form 941 (sp). The new Form 941 (sp) Who Must File Form 8974?
will also similarly replace Form 941-PR, which is being You must file Form 8974 and attach it to Form 941, 943, or
discontinued along with Form 941-SS. Form 941 (sp), 943 944 if you made an election on your income tax return to
(sp), and 944 (sp) will be usable by any employer that claim the qualified small business payroll tax credit for
prefers their form in Spanish, whether they are located in increasing research activities against your payroll taxes.
the United States, Puerto Rico, or one of the other The payroll tax credit must be elected on an original
territories. Where authority is granted for any form, it is income tax return that is timely filed (including
also effective for related forms such as the corresponding extensions). The election is made on Form 6765. If you
non-English language form. haven’t filed the income tax return making the election to
claim the payroll tax credit on Form 6765, you can’t file
Reminders Form 8974 and can’t claim the qualified small business
payroll tax credit for increasing research activities against
The qualified small business payroll tax credit for in-
your payroll taxes on Form 941, 943, or 944.
creasing research activities has increased and been
modified. For tax years beginning before January 1, You can’t claim the qualified small business
2023, a qualified small business may elect to claim up to ! payroll tax credit for increasing research activities
$250,000 of its credit for increasing research activities as CAUTION on Form 941, 943, or 944 unless you make the
a payroll tax credit. The Inflation Reduction Act of 2022 election on Form 6765 and then file Form 8974 attached
(the IRA) increases the election amount to $500,000 for to Form 941, 943, or 944.
tax years beginning after December 31, 2022. The payroll
tax credit election must be made on or before the due date Aggregate Form 941 or Form 943
of the originally filed income tax return (including If you're a section 3504 agent or a certified professional
extensions). The portion of the credit used against payroll employer organization (CPEO), you must complete
taxes is allowed in the first calendar quarter beginning Schedule R (Form 941), Allocation Schedule for
after the date that the qualified small business filed its Aggregate Form 941 Filers, when filing an aggregate Form
income tax return. The election and determination of the 941, or Schedule R (Form 943), Allocation Schedule for
credit amount that will be used against the employer's Aggregate Form 943 Filers, when filing an aggregate Form
payroll taxes are made on Form 6765, Credit for 943. Other third-party payers that file an aggregate Form
Increasing Research Activities. The amount from Form 941 or 943, such as non-certified PEOs, must complete
6765, line 44, must then be reported on Form 8974. and file Schedule R if they have clients that are claiming
Starting in the first quarter of 2023, the payroll tax credit the qualified small business payroll tax credit for
is first used to reduce the employer share of social increasing research activities. For you to claim the credit,
security tax up to $250,000 per quarter and any remaining your client must be a qualified small business and must
credit reduces the employer share of Medicare tax for the elect to apply the research credit against payroll tax
quarter. Any remaining credit, after reducing the employer liability by attaching Form 6765 to its timely filed income

Dec 6, 2023 Cat. No. 68750R

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tax return. Additionally, you must attach a Form 8974 for 
each client that is taking the credit. See the instructions for Specific Instructions
Line 8 Line 9, , and Line 14, later, for more information. 
Also, go to IRS.gov/ResearchPayrollTC for more                  Enter Your Business Information
information.                                                    Enter your employer identification number (EIN) and name 
                                                                at the top of Form 8974. Make sure that they exactly 
Correcting Form 8974                                            match the name of your business and the EIN that the IRS 
If you discover an error on a previously filed Form 8974,       assigned to your business and also match the name and 
make the correction by filing Form 941-X, Adjusted              EIN shown on Form 941, 943, or 944. Also check a box to 
Employer's QUARTERLY Federal Tax Return or Claim for            tell us on which form you'll take the credit from Part 2, 
Refund; Form 943-X, Adjusted Employer's Annual Federal          line 12 or, if applicable, line 17. Check only one box.
Tax Return for Agricultural Employees or Claim for Refund; 
                                                                            If you’re filing Schedule R with Form 941 or Form 
or Form 944-X, Adjusted Employer's ANNUAL Federal Tax 
                                                                            943, the EIN entered at the top of each client’s or 
Return or Claim for Refund, as applicable. Attach a                 CAUTION!
                                                                            customer’s Form 8974 must be the EIN of the 
corrected Form 8974 to your amended return. For more 
                                                                client or customer.
information, see the instructions for Form 941-X, 943-X, or 
944-X.
                                                                Calendar Year
When Must You File?                                             Enter the calendar year as shown on the attached Form 
                                                                941, 943, or 944.
Quarterly Form 941 Filers
You can first claim the qualified small business payroll tax    Check the Box for the Quarter (Forms 
credit for increasing research activities on the Form 941       941 Series Only)
for the quarter that begins after you file your income tax 
                                                                Under Report for this quarter at the top of Form 8974, 
return that makes the election on Form 6765. The Form 
                                                                check the appropriate box of the quarter for which you’re 
941 for that quarter is the Form 941 on which you’re 
                                                                filing Form 8974. The quarter must match the quarter as 
required to claim the credit. You can’t claim the credit 
                                                                shown on Form 941. Check only one box.
related to this election on a different quarter’s Form 941 
unless it is to take a carryforward credit from the required    Part 1: Tell Us About Your Income Tax 
quarter, as determined on Form 8974.
                                                                Return
Example for Form 941 filers.   If you file your 2023 
income tax return based on a calendar year (January 1–          Lines 1–5
December 31) on March 15, 2024, the 2024 second 
                                                                The payroll tax credit election on Form 6765 is limited to 5 
quarter (April 1, 2024–June 30, 2024) Form 941, which is 
                                                                tax years (including if members of your controlled group 
filed by July 31, 2024, is the first quarter that you can take 
                                                                previously made the election). Use lines 1–5 to report the 
the qualified small business payroll tax credit for 
                                                                credit from each tax year. Enter the income tax years in 
increasing research activities.
                                                                chronological order with the earliest year entered on 
Annual Form 943 or 944 Filers                                   line 1. You must continue to report each income tax year 
                                                                election until the remaining credit (column (g)) for the 
You can first claim the qualified small business payroll tax 
                                                                income tax year reaches zero.
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      Column (a)
Form 6765. The Form 943 or 944 for the year that includes 
                                                                Enter the ending date of your income tax period. Enter the 
that quarter is the Form 943 or 944 on which you’re 
                                                                date as “MM/DD/YYYY.” For example, if your 2023 income 
required to claim the credit. You can’t claim the credit 
                                                                tax return was for a calendar year, enter “12/31/2023.” If 
related to this election on a Form 943 or 944 for a different 
                                                                your income tax return was for a fiscal year that ended on 
year unless it is to take a carryforward credit from the 
                                                                June 30, 2023, enter “06/30/2023.”
required year, as determined on Form 8974.
Example for Form 943 or 944 Filers.  If you filed your          Column (b)
2023 income tax return based on a calendar year 
(January 1–December 31) on March 15, 2024, the 2024             Tell us which income tax return you filed that elected a 
second quarter (April 1, 2024–June 30, 2024) is the first       qualified small business payroll tax credit on Form 6765. 
quarter that you can take the qualified small business          Form 6765 can be attached to Form 1040, 1065, 1120, 
payroll tax credit for increasing research activities.          1120-F, or 1120-S.
Therefore, the 2024 Form 943 or 944, which is filed by 
January 31, 2025, is the first year on which you can claim      Column (c)
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, “03/15/2024”).

                                                                -2-              Instructions for Form 8974 (Rev. 12-2023)

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Column (d)                                                       amount from your 2023 income tax return, and enter 
                                                                 $100,000 in column (g). You complete lines 7–17 and 
If the EIN used on Form 8974 isn’t the same as the EIN           learn that you can only use $75,000 of the credit for the 
used on Form 6765, enter the EIN that was used on Form           second quarter of 2024. You have a $25,000 carryforward 
6765. Generally, the EIN used on Form 8974 should be             to the third quarter of 2024.
the same as the EIN used on Form 6765. However, if               On the Form 8974 that you attach to your third quarter 
you’re a member of a controlled group of corporations (as        2024 Form 941, you’ll enter on line 1, columns (a)–(d), the 
defined in sections 41(f)(1)(A) and (f)(5)) or a member of a     same information (your 2023 income tax return 
group of trades or businesses under common control (as           information) that you reported on the previously filed Form 
defined in section 41(f)(1)(B) and Regulations section           8974, line 1, columns (a)–(d) (the Form 8974 that you 
1.41-6(a)(3)(ii)), the EIN used on Form 6765 may be              attached to your second quarter 2024 Form 941). You’ll 
different from the EIN that you must use on Form 8974.           enter $100,000 in column (e) (same as you did for the 
                                                                 second quarter of 2024) but now you must also enter 
Column (e)                                                       $75,000 in column (f) because this is the amount of the 
                                                                 credit from column (e) that you claimed in a previous 
Generally, enter the amount from Form 6765, line 44.             period. You’ll enter $25,000 in column (g), which is your 
However, if you’re a member of a controlled group of             carryforward from the prior quarter.
corporations (as defined in sections 41(f)(1)(A) and (f)(5))             The discussion under Carryforward above also 
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 one year is carried forward 
Regulations section 1.41-6(a)(3)(ii)), enter the amount of       to 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 5 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 2023 income tax return on         line 3, if the client filed its own Form 941 or 943. See 
March 15, 2024. On the Form 8974 that you attach to your         Line 11 Adjustment for Filers of Form 943 or 944, later, for 
second quarter 2024 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 2024 is the first time you’re using the elected 

Instructions for Form 8974 (Rev. 12-2023)                     -3-

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Line 9 Line 11 (before considering Form 941, line 8)
Enter the amount from Form 941, line 5b, column 2; or – Amount of social security tax included on Form 941, line 8
Form 944, line 4b, column 2. This is the total amount of = Final amount to enter on line 11
social security tax on tips.
If you’re filing an aggregate Form 941, you must
Example. You entered $12,400 on Form 8974, line 8,
CAUTION qualified small business payroll tax credit for
! file a Form 8974 for each client that is taking the and zero on line 9. Line 10 was also $12,400. 50% of
increasing research activities. Also, you can’t enter the line 10 is $6,200. However, this amount must be adjusted
amount from Form 941, line 5b, column 2, on line 9 of any because you reported $6,120 ($4,960 of social security
of the Forms 8974 that are attached to the aggregate tax and $1,160 of Medicare tax) on Form 941, line 8. You
Form 941. This portion of the credit is based on each must subtract $4,960 (amount of social security tax
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
= Final amount to enter on line 11
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
Example. You entered $12,400 on Form 8974, line 8,
tax.
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
was for wages paid to your client’s employees. For
Third-Party Payers of Sick Pay
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
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.

-4- Instructions for Form 8974 (Rev. 12-2023)

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Line 11 (before considering a Section 3121(q) Notice and             here on your Form 8974 for that subsequent year because 
Demand)                                                              this portion of the credit can be applied against the 
+ Employer’s share of social security tax from Letter 3263 or        employer social security tax paid in all four quarters of that 
Letter 4520                                                          subsequent year. The instructions next explain the 
                                                                     adjustment in two situations: (1) you're claiming the credit, 
= Final amount to enter on line 11
                                                                     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 
  Example.  You entered $12,400 on Form 8974, line 8, 
                                                                     carryforward from a prior year.
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,              First year claiming the credit or subsequent year 
line 5f, because you received Letter 3263. Letter 3263               claiming the credit but without a credit carryforward 
showed unreported tips of $20,000 and tax due of $1,530.             from a prior year. 
The attachment to Letter 3263 listed your liability for tax on       Steps to determine the amount to report on Form 
unreported tips as follows.                                          8974, line 11. 
• Employer’s share of social security tax: $1,240
                                                                     1. Determine the amount of social security tax 
• Employer’s share of Medicare tax: $290
                                                                     reported on Form 8974, line 10, attributable to each 
You must add $1,240 (employer’s share of social security 
                                                                     quarter of the year that is reported in the calendar year 
tax from Letter 3263) to $9,300 (50% of the amount 
                                                                     box at the top of Form 8974 and enter these amounts in 
reported on line 10) and enter $10,540 on line 11.
                                                                     the table below in column (b). Multiply each quarter’s 
                                                                     social security tax by 50% (0.50) and enter the amounts in 
Line 11 Adjustment for Filers of Form 943 or 944                     column (c).
Employers who report their payroll taxes on an annual 
basis (Forms 943 and 944) may need to adjust the                                                             (d) Amount 
                                                                                                (c) Multiply from column 
amount reported on Form 8974, line 11, because the                                  (b) Social 
                                                                     (a) Quarter                column (b) by  (c) to include 
qualified small business payroll tax credit for increasing                          security tax
                                                                                                50% (0.50)   on Form 8974, 
research activities can’t be claimed until the first calendar                                                line 11
quarter that begins after the date on which you file your 
income tax return that makes the election to take the credit         First (Jan. 1–
                                                                     Mar. 31)
against payroll taxes. The amount reported on Form 8974, 
line 10, is the total amount of social security tax (both            Second (Apr. 1–
employer and employee share) for the whole year, but you             June 30)
can only apply this portion of the credit against the                Third (July 1–
employer share of social security tax paid in calendar               Sept. 30)
quarters that began after the date on which you filed your           Fourth (Oct. 1–
income tax return making the election. You can’t apply the           Dec. 31)
credit against the employer share of social security tax             Total
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            2. Determine when the election was made (that is, the 
report on Form 8974, line 11, to be 50% of the total social          date that you filed your income tax return as reported on 
security tax that you paid in the quarters after the income          Form 8974, Part 1, column (c)).
tax return making the election was filed. However, as 
discussed later, the credit or any previous credit carried           3. Enter in column (d) the amounts from column (c) for 
forward is first taken against the employer share of social          the quarters that began after the date determined above in 
security tax up to $250,000 per quarter, then any                    Step 2. Add the amounts in column (d), and enter the total 
remaining elected credit or any previous credit carried              on Form 8974, line 11.
forward is taken against the employer share of Medicare              Form 943 example (first year claiming the credit). 
tax, and then any unused credit is available to be carried           You filed your 2023 income tax return based on a calendar 
forward to the next quarter.                                         year (January 1–December 31) on April 15, 2024. You 
                                                                     elected to take a $100,000 payroll tax credit for increasing 
  When filing Form 943 or Form 944 and claiming the                  research activities on the Form 6765 that you filed with 
payroll tax credit, you’ll need to adjust the amount you             your 2023 income tax return. You’ll claim the payroll tax 
report on line 11 if it is the first year claiming the credit, or    credit on your 2024 Form 943 that you file in January 
a subsequent year claiming the credit and the income tax             2025. In January 2025, you prepare your 2024 Form 943 
return electing the credit was filed on any date in the first 3      and Form 8974 to take the payroll credit. The amount you 
quarters of the calendar year (that is, January 1–                   figured on Form 8974, line 10, for total social security tax 
September 30). In contrast, if you made the election on an           paid in 2024 is $80,000. Following Step 1 above, you 
income tax return filed in the fourth quarter of the year            determine the following social security tax breakdown by 
(October 1–December 31), you can't claim the credit until            quarter.
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-

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(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, 2024. 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 2025 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 2024. 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 2025
income tax return for the prior year. However, the amounts Form 943. You filed your 2024 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 2025. 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 2024 income tax return. You’ll claim the
which you filed your income tax return as explained earlier. payroll tax credit on your 2025 Form 943 that you file in
January 2026. In January 2026, you prepare your 2025
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 2024, and $200,000 for 2025). 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 2025 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. 12-2023)

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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, 2025. 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 2025 and Demand, check the applicable box on line 11 and see
is $170,000 ($55,000 carried forward from your 2024 the instructions next.
Form 8974 and $115,000 from your 2025 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 2026 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 14, included Medicare tax for your clients’ employees,
line 11a; Form 943, line 12a; or Form 944, line 8a. This is you must make an adjustment to the amount reported on
the total credit against the employer share of social Form 8974, line 15.
security tax. If line 12 is less than line 7, see the Adjustment if you transferred liability. If you
instructions for lines 13–17. Any remaining elected credit transferred the liability for the employer's share of
or any previous credit carried forward is taken against the Medicare tax to the employer (client), you must reduce the
employer share of Medicare tax, and then any unused amount reported on Form 8974, line 15, by the amount of
credit is carried forward to the next quarter (Form 941) or Medicare tax included on Form 941, line 8. Don't just
year (Form 943 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. 12-2023) -7-

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security tax and $1,160 of Medicare tax) on Form 941,              You must add $290 (employer’s share of Medicare tax 
line 8. You must subtract $1,160 (amount of Medicare tax           from Letter 3263) to $2,175 (50% of the amount reported 
reported on Form 941, line 8) from $1,450 (50% of the              on line 14) and enter $2,465 on line 15.
amount reported on line 14) and enter $290 on line 15.
                                                                   Line 15 Adjustment for Filers of Form 943 or 944
Adjustment if you didn’t transfer liability.         If you didn't 
transfer the liability for the employer's share of Medicare        If you had credit remaining after reducing the employer 
tax to the employer (client) and you paid the employer             share of social security tax, that remaining credit goes 
Medicare tax on the third-party sick pay that you paid on          against the employer share of Medicare tax. Employers 
behalf of the client, you must reduce the amount reported          who report their payroll taxes on an annual basis (Forms 
on line 15 by any employer Medicare tax (included on               943 and 944) may need to adjust the amount reported on 
Form 941, line 5c, column 2) that was for the employees of         Form 8974, line 15, because the qualified small business 
the client.                                                        payroll tax credit for increasing research activities can't be 
                                                                   claimed until the first calendar quarter that begins after the 
Line 15 (before adjustment for third-party sick pay)               date on which you file your income tax return that makes 
– Amount of employer’s share of Medicare tax (on wages paid to     the election to take the credit against payroll taxes. The 
clients’ employees) included on Form 941, line 5c, column 2        amount reported on Form 8974, line 14, is the total 
= Final amount to enter on line 15                                 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 
                                                                   Medicare tax paid in calendar quarters that began after 
  Example.  You entered $2,900 on Form 8974, line 14. 
                                                                   the date on which you filed your income tax return making 
50% of line 14 is $1,450. However, this amount must be 
                                                                   the election. You can't apply the credit against the 
adjusted because the amount from Form 941, line 5c, 
                                                                   employer share of Medicare tax paid in any calendar 
column 2, that was entered on line 14 included the 
                                                                   quarter that began before the date on which you filed your 
employer’s share of Medicare tax that you paid for the 
                                                                   income tax return making the election. You may therefore 
wages paid to your client’s employees. There isn’t a line 
                                                                   need to adjust the amount you report on Form 8974, 
on Form 941 that can assist in this calculation but you 
                                                                   line 15, to be 50% of the total Medicare tax that you paid 
must still determine the amount of Form 941, line 5c, 
                                                                   in the quarters after the income tax return making the 
column 2, that was for wages paid to your client’s 
                                                                   election was filed. To make this adjustment, you can use 
employees. For purposes of this example, if you determine 
                                                                   the tables in the instructions for line 11 by substituting 
that $1,150 of the employer’s Medicare tax included on 
                                                                   column (b) with Medicare tax and substituting references 
Form 941, line 5c, column 2, was attributable to your 
                                                                   to Form 8974, line 10, with Form 8974, line 14, and 
client’s employees, you must subtract $1,150 from $1,450 
                                                                   references to Form 8974, line 11, with Form 8974, line 15.
(50% of the amount reported on line 14) and enter $300 
on line 15.                                                        Line 16
Section 3121(q) Notice and Demand                                  Enter the smaller of line 13 or 15. This is the total credit 
                                                                   against the employer share of Medicare tax.
If you received a Section 3121(q) Notice and Demand for 
tax due on unreported tips (Letter 3263 or Letter 4520)            Line 17
during the quarter, you report the amount for the 
employer’s share of social security tax and Medicare tax           Add lines 12 and 16. Also, enter this amount on Form 941, 
on Form 941, line 5f. Letter 3263 or Letter 4520 includes          line 11a; Form 943, line 12a; or Form 944, line 8a. This is 
an attachment that shows the employer’s share of                   the total qualified small business payroll tax credit for 
Medicare tax. You must add the employer’s share of                 increasing research activities.
Medicare tax to the amount reported on Form 8974, 
                                                                   Paperwork Reduction Act Notice.    We ask for the 
line 15.
                                                                   information on Form 8974 to carry out the Internal 
Line 15 (before considering a Section 3121(q) Notice and           Revenue laws of the United States. You’re required to give 
Demand)                                                            us the information. We need it to ensure that you’re 
+ Employer’s share of Medicare tax from Letter 3263 or Letter      complying with these laws and to allow us to figure and 
4520                                                               collect the right amount of tax.
= 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. 
  Example.  You entered $4,350 on Form 8974, line 14.              Books or records relating to a form or its instructions must 
50% of line 14 is $2,175, but you also reported an amount          be retained as long as their contents may become 
on Form 941, line 5f, because you received Letter 3263.            material in the administration of any Internal Revenue law. 
Letter 3263 showed unreported tips of $20,000 and tax              Generally, tax returns and return information are 
due of $1,530. The attachment to Letter 3263 listed your           confidential, as required by Code section 6103.
liability for tax on unreported tips as follows.
                                                                       The time needed to complete and file Form 8974 will 
• Employer’s share of social security tax: $1,240
                                                                   vary depending on individual circumstances. The 
• Employer’s share of Medicare tax: $290
                                                                   estimated average time is:

                                                                   -8-    Instructions for Form 8974 (Rev. 12-2023)

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Recordkeeping. . . . . . . . . . . . . . . . . . . . . . . 45 min.    can send us comments from IRS.gov/FormComments. Or 
Learning about the law or the form. . . . . . . . . .      1 hr.      you can write to the Internal Revenue Service, Tax Forms 
Preparing and sending the form to the IRS        . . . .   1 hr.      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 
If you have comments concerning the accuracy of                       the Instructions for Form 941 or the Instructions for Form 
these time estimates or suggestions for making Form                   944; or see Where To File in the Instructions for Form 943.
8974 simpler, we would be happy to hear from you. You 

Instructions for Form 8974 (Rev. 12-2023)                          -9-

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