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Payroll Tax Credits in 2026: What Employers Can Still Claim
Payroll tax credits in 2026 fall into two groups. Only the R&D election reduces the payroll tax on Form 941: startups under $5 million in gross receipts can apply up to $500,000 a year. The FICA tip credit, the paid leave, child care and retirement plan credits, and others reduce income tax instead. The WOTC closed to hires after 2025.
When employers search for a payroll tax credit, they usually mean any federal credit the IRS measures with wages. The split in the answer above matters most to a small business with little or no income tax: a credit on Form 941 cuts payroll tax the company already owes every quarter, while an income tax credit helps only once there is income tax to offset, and otherwise carries forward. Since the COVID-era programs ended, none of these is a refundable payroll tax credit for a taxable employer. Below is each credit that is open in 2026: who qualifies, the form, what it is worth, and which tax it reduces.
Two kinds of payroll tax credit
Credits that reduce payroll tax. Form 941 for 2026 (Rev. March 2026) has one credit line. Line 11 is the qualified small business payroll tax credit for increasing research activities, the R&D payroll election, and line 12 is the tax left after it. That credit offsets only the employer share of Social Security and Medicare tax. It never touches income tax withholding or the employee share, and anything a quarter cannot absorb carries to the next quarter.
Credits that reduce income tax. Everything else here is a general business credit, figured on its own form and totaled on Form 3800 with the annual income tax return. Unused amounts carry back 1 year and forward 20 years under section 39. Most also trim a deduction: section 280C(a) disallows the wage deduction equal to the work opportunity, paid leave and differential wage credits, and the FICA tip credit reduces the deduction for the employer tax it is built on. The net gain is smaller than the credit itself.
2026 payroll tax credits at a glance
| Credit | Who it fits | What it is worth | Form | Reduces | 2026 status |
|---|---|---|---|---|---|
| R&D payroll election (IRC 41(h)) | Startups under $5 million in gross receipts with no receipts before the 5-year window | Up to $500,000 a year of research credit | Form 6765, Section D; then Form 8974 with Form 941 | Payroll tax: employer Social Security, then Medicare | Open |
| FICA tip credit (IRC 45B) | Food and beverage employers; beauty service employers for tax years beginning after 2024 | 7.65% of creditable tips | Form 8846 | Income tax | Open, expanded |
| Paid family and medical leave (IRC 45S) | Employers with a written policy: 2+ weeks of paid leave at 50%+ of pay | 12.5% to 25% of leave wages (12 weeks max), or of leave insurance premiums for tax years beginning after 2025 | Form 8994 | Income tax | Permanent; new rules for 2026 |
| Employer-provided child care (IRC 45F) | Employers that build, run or contract for employee child care | 40% of costs (50% for eligible small businesses), capped at $500,000 ($600,000) | Form 8882 | Income tax | Larger for costs paid after 2025 |
| Retirement plan startup (IRC 45E) | Up to 100 employees earning $5,000+, starting a new plan | Up to $5,000 a year for 3 years, plus up to $1,000 per employee in contributions | Form 8881, Part I | Income tax | Open |
| Auto-enrollment (IRC 45T) | Same size limit, adding automatic enrollment to the plan | $500 a year for 3 years | Form 8881, Part II | Income tax | Open |
| Military spouse participation (IRC 45AA) | Same size limit, military spouses in a defined contribution plan | Up to $500 per military spouse a year for 3 years | Form 8881, Part III | Income tax | Open |
| Differential wage payments (IRC 45P) | Employers paying staff on active duty for more than 30 days | 20% of up to $20,000 per employee | Form 8932 | Income tax | Open, permanent |
| Small employer health insurance (IRC 45R) | 25 or fewer FTEs, average wages up to $68,200 in 2026, SHOP coverage | Up to 50% of premiums (35% for tax-exempt employers), 2 years | Form 8941 | Income tax (refundable for tax-exempt employers, capped at payroll taxes) | Open |
| Work Opportunity Tax Credit (IRC 51) | Certified targeted-group hires who began work by December 31, 2025 | 40% of up to $6,000 of first-year wages; more for some veterans | Form 5884 (Form 5884-C for tax-exempt employers) | Income tax (payroll tax for tax-exempt employers) | Closed to hires after 2025 |
Dollar figures are federal amounts for 2026 or for the credit year shown. Every credit has further conditions in the sections below.
The one credit on Form 941: the R&D payroll election
The qualified small business election in IRC 41(h) moves up to $500,000 a year of the federal research credit from the income tax return to Form 941. A company qualifies for a year when its gross receipts are under $5 million and it had no gross receipts in any year before the five-year period ending with that year, counting every member of a controlled group. It also needs qualified research: wages, supplies and contract research spent on technical work that passes the four-part test.
The election goes in Section D of Form 6765 on an original income tax return filed on time, extensions included; the IRS payroll tax credit page says it cannot be made on an amended return. Starting with the first quarter that begins after that return is filed, Form 8974 applies the credit to the employer share of Social Security tax, up to $250,000 a quarter, then to the employer share of Medicare tax, and the result goes on Form 941 line 11. A business can make the election for five tax years at most. The Form 6765 and Form 8974 guide walks through every line, and the R&D tax credit calculator estimates the credit and how many quarters it takes to use.
Credits that reduce income tax
FICA tip credit (IRC 45B)
Employers whose staff receive customary tips for providing, delivering or serving food or beverages get back the employer Social Security and Medicare tax, 7.65%, paid on those tips. Tips needed to bring cash wages up to $5.15 an hour, the federal minimum wage on January 1, 2007, do not count. P.L. 119-21 added barbering and hair care, nail care, esthetics, and body and spa treatments for tax years beginning after December 31, 2024, measured against the current $7.25 federal minimum wage instead. It is claimed on Form 8846. Our FICA tip credit guide has the monthly math, a worked example and the new W-2 tip reporting.
Paid family and medical leave credit (IRC 45S)
P.L. 119-21 made this credit permanent; it had been set to expire after 2025. An eligible employer has a written policy giving qualifying employees at least two weeks of paid family and medical leave a year (prorated for part-time staff) at 50% or more of normal wages. The credit starts at 12.5% of the leave wages paid and rises 0.25 point for each point the pay rate exceeds 50%, to a maximum of 25%, for up to 12 weeks per employee a year.
Under section 45S as amended, several changes apply for tax years beginning after December 31, 2025. The employer can base the credit on premiums for a paid leave insurance policy instead of wages. It can treat employees with 6 months of service as qualifying, rather than a full year. Qualifying employees must customarily work at least 20 hours a week. Leave a state pays for or requires counts toward the policy but not toward the credit. For 2026, a qualifying employee's 2025 pay cannot exceed $96,000, per the Form 8994 instructions. Claimed on Form 8994.
Employer-provided child care credit (IRC 45F)
For amounts paid or incurred after December 31, 2025, the credit rises from 25% to 40% of qualified child care expenditures, or 50% for an eligible small business, plus 10% of child care resource and referral costs. The annual cap rises from $150,000 to $500,000, or $600,000 for an eligible small business, indexed for inflation after 2026. Qualified costs include acquiring, building or expanding a licensed child care facility for employees, running it, and contracting for care with a qualified facility or, now, with an intermediary that contracts with facilities.
An eligible small business meets the section 448(c) gross receipts test averaged over five years instead of three; the 2026 threshold is $32 million. Facility credits are recaptured on a sliding scale if, within 10 years, the facility stops operating or is sold without the buyer taking on the recapture, per section 45F. Claimed on Form 8882.
Retirement plan credits (IRC 45E, 45T and 45AA)
Employers with no more than 100 employees who earned at least $5,000 in the prior year can claim three credits on Form 8881:
- Startup costs (Part I). 50% of the cost to set up and run a new plan and educate employees about it, or 100% for employers with 50 or fewer employees. The yearly cap is the greater of $500 or $250 per eligible non-highly compensated employee, up to $5,000, for the first credit year and the two after it. A plan covering substantially the same employees in the prior three years rules the credit out.
- Employer contributions (Part I). Up to $1,000 per employee a year toward a defined contribution plan: 100% in the year the plan starts and the next year, then 75%, 50% and 25%. Employees paid more than $110,000 in 2026 are left out, per Notice 2025-67, and the amount phases down for employers with more than 50 employees.
- Auto-enrollment (Part II). $500 a year for three years once the plan includes an eligible automatic contribution arrangement.
- Military spouses (Part III). $200 for each participating military spouse plus up to $300 of employer contributions, for the year participation starts and the next two, if the plan lets military spouses join within two months and vests them immediately.
Differential wage payment credit (IRC 45P)
When an employee serving on active duty for more than 30 days keeps receiving some or all of their pay, the employer can claim 20% of up to $20,000 of those differential wage payments per employee a year, so $4,000 at most. The employee must have worked for you for the 91 days before the payment period. Employers of any size qualify, and the credit has no expiration date under section 45P. Claimed on Form 8932.
Small employer health insurance credit (IRC 45R)
An employer with no more than 25 full-time equivalent employees and average annual wages of no more than $68,200 in 2026 (twice the $34,100 amount in Rev. Proc. 2025-32) can claim up to 50% of the premiums it pays for employees' qualified health plans bought through the SHOP Marketplace, or 35% for a tax-exempt employer. It must pay a uniform share of at least 50% of the premium. The credit shrinks as full-time equivalents rise above 10 and as average wages rise above $34,100, and it lasts two consecutive tax years only. A tax-exempt employer receives it as a refundable credit, capped at its payroll taxes for the year. Claimed on Form 8941.
Work Opportunity Tax Credit (IRC 51): closed to new hires
The WOTC does not apply to anyone who begins work after December 31, 2025, the end date Congress set in December 2020. As of September 2026 no extension has been enacted, and on March 19, 2026 the IRS posted that Form 8850 is no longer in use. The credit still runs for certified employees who started on or before December 31, 2025, because it follows the first year of work: 40% of up to $6,000 of first-year wages (usually a $2,400 maximum), 25% for an employee who works 120 to 399 hours, nothing under 120 hours, and up to $24,000 of wages for certain veterans, per the IRS WOTC page. For long-term family assistance recipients the cap is $10,000 a year, and 50% of second-year wages also counts. Taxable employers claim it on Form 5884. Tax-exempt employers can claim it only for qualified veterans, against payroll tax, on Form 5884-C.
Credits that ended
- Employee Retention Credit. A refundable credit against employer payroll tax for qualified wages paid from March 13, 2020 through September 30, 2021 (December 31, 2021 for recovery startup businesses). The IRS deadlines to claim it were April 15, 2024 for 2020 quarters and April 15, 2025 for 2021 quarters, for employers that filed their quarterly returns on time. The Employee Retention Credit in 2026 covers pending claims, withdrawals and the 2025 law changes.
- COVID paid sick and family leave credits. Refundable credits for qualifying leave taken from April 1, 2020 through September 30, 2021: under the Families First Coronavirus Response Act, its extension through March 31, 2021, and then the American Rescue Plan Act (IRS overview).
- Work Opportunity Tax Credit for new hires. Closed to anyone who starts work after December 31, 2025, as above.
Which credits fit your business
| If you are | Start with |
|---|---|
| A startup doing product, software or engineering work, under $5 million in receipts | The R&D payroll election first. It cuts payroll tax you already pay, whether or not the company owes income tax. |
| A restaurant, bar, salon, barbershop, nail, esthetics or spa business with tipped employees | The FICA tip credit, every year you pay Social Security and Medicare tax on tips. |
| An employer with 100 or fewer employees starting a 401(k) or other plan | The three Form 8881 credits: startup costs and contributions, auto-enrollment, military spouses. |
| An employer that offers paid family or medical leave in writing | The paid leave credit, now permanent, with an insurance-premium option from 2026. |
| An employer with Guard or Reserve members who keep pay while deployed | The differential wage payment credit, up to $4,000 per employee a year. |
| A small employer with modest average wages buying SHOP coverage | The small employer health insurance credit, for two consecutive years only. |
| An employer paying for employee child care | The child care credit, at the higher rates for costs paid after 2025. |
Timing rules that cost employers credits
- R&D payroll election. Only on the original income tax return, filed on time with extensions. The IRS does not accept it on an amended return.
- FICA tip credit. Can be claimed, or declined, on an original or amended return within 3 years of the return’s due date.
- Retirement plan startup credit. Runs for the first credit year and the 2 years after it. The first credit year can be the year before the plan takes effect, if you elect it.
- Small employer health insurance credit. Two consecutive tax years, starting the first year you offer a qualified plan through the SHOP Marketplace.
- Work Opportunity Tax Credit. Required a certification request to the state workforce agency within 28 days of the start date. For 2025 hires that window has closed.
Established companies past the five-year window keep the research credit against income tax, and open prior years can often be amended to claim it. That is the Credit Recovery work on the Tax Planning page.
Anthony leads sales at Business Executive Group, a national HR services firm. BEG coordinates the R&D payroll tax credit with each client's payroll. The tax work itself is done by licensed tax professionals at BEG's tax partner.
Sources: IRS, Form 941 for 2026 (Rev. March 2026); IRS, Qualified small business payroll tax credit for increasing research activities; IRS, Instructions for Form 8974 (Rev. December 2024); 26 U.S.C. 41; 26 U.S.C. 3111; 26 U.S.C. 45B; IRS, Form 8846 (2025); 26 U.S.C. 45S; IRS, Instructions for Form 8994 (Rev. December 2024); 26 U.S.C. 45F; 26 U.S.C. 45E; 26 U.S.C. 45T; 26 U.S.C. 45AA; IRS, Form 8881 (Rev. December 2025); IRS, Notice 2025-67; 26 U.S.C. 45P; 26 U.S.C. 45R; IRS, Instructions for Form 8941 (2025); IRS, Rev. Proc. 2025-32; 26 U.S.C. 51; IRS, Work Opportunity Tax Credit; IRS, Form 8850 is no longer in use; 26 U.S.C. 280C; 26 U.S.C. 39; IRS, Employee Retention Credit; IRS, Employee Retention Credit FAQs; IRS, Tax credits for paid leave under the American Rescue Plan Act of 2021; Public Law 119-21 (July 4, 2025). Figures and rules checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
Payroll tax credit questions
What is a payroll tax credit?
Any federal credit the IRS measures with the wages you pay. Only one reduces the payroll tax on Form 941 in 2026: the R&D payroll election for qualified small businesses. The others, such as the FICA tip credit and the paid leave credit, are general business credits that reduce income tax on Form 3800.
Which payroll tax credit can a small business claim in 2026?
It depends on what the business does. A startup with research wages can use the R&D payroll election. Tipped food, beverage and beauty businesses can claim the FICA tip credit. Employers with up to 100 employees starting a retirement plan can claim the Form 8881 credits. Paid leave, child care, differential wage and small employer health insurance credits apply when you offer those benefits.
Is there a refundable payroll tax credit in 2026?
Not for a taxable employer. The refundable COVID-era credits, the Employee Retention Credit and the paid sick and family leave credits, ended in 2021. The R&D payroll election is capped at the employer share of Social Security and Medicare tax each quarter, with any excess carried to the next quarter. Tax-exempt employers get the small employer health insurance credit as a refundable credit capped at their payroll taxes.
What goes on Form 941 line 11 in 2026?
The qualified small business payroll tax credit for increasing research activities, with Form 8974 attached. It is the only credit line on Form 941 for 2026 (Rev. March 2026).
Is the Work Opportunity Tax Credit available in 2026?
Only for employees who began work on or before December 31, 2025. The law excludes wages paid to anyone who starts after that date, and the IRS retired Form 8850 on March 19, 2026. Wages paid in 2026 to an earlier certified hire can still count, because the credit follows the employee’s first year of work.
Is there a new payroll tax credit for 2026?
No new credit reduces Form 941. P.L. 119-21, signed July 4, 2025, changed existing credits: it extended the FICA tip credit to beauty service businesses for tax years beginning after 2024, made the paid leave credit permanent with new options from 2026, and raised the child care credit for costs paid after 2025.
Do these credits reduce my wage deduction?
Most do. Section 280C(a) disallows the wage deduction equal to the work opportunity, paid leave and differential wage credits, and the FICA tip credit reduces the deduction for the employer Social Security and Medicare tax it is based on. The net benefit is smaller than the credit itself.
What happens to a credit I cannot use this year?
Unused general business credits carry back 1 year and forward 20 years. The R&D payroll election works differently: credit larger than a quarter’s employer Social Security and Medicare tax carries to the next quarter.
Can S corporations and partnerships claim these credits?
Yes. Partnerships and S corporations make the R&D payroll election at the entity level, on their own timely filed return. For the FICA tip credit, the entity must file Form 8846 and reports the credit to its owners on Schedule K.
Is the Employee Retention Credit still available?
Not for new claims from employers that filed their quarterly returns on time. The IRS deadlines were April 15, 2024 for 2020 quarters and April 15, 2025 for 2021 quarters, and a 2025 law bars late-2021 claims filed after January 31, 2024. Claims already filed are still being processed.
R&D Payroll Tax Credit
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Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
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