Which employee activities may qualify?
Qualified services can include performing qualified research, directly supervising it, or directly supporting it (IRC §41(b)(2)(B)). Direct supervision means immediate, first-line supervision; an executive's general oversight is not automatically the same thing. The wage rules are addressed in Treas. Reg. §1.41-2.
Start with the activities that have been evaluated for qualification. Then identify which employees participated and in what capacity. A research department label cannot resolve whether the underlying work qualifies, and a person outside that department should not be overlooked solely because of a title.
Separate research from other duties.
An engineer may divide a year among prototype testing, production support, customer meetings, and ordinary maintenance. The wage schedule should show which activities were included, which were excluded, and how the records support that split. It should not assume every hour on a development project has the same tax treatment.
For an illustrative equipment project, compare the employee's work designing and evaluating uncertain technical alternatives with later routine checks on completed equipment. Identify the dates and records for each phase. The project's commercial importance does not eliminate the need to examine what happened during the claimed period.
Ask about employees who changed roles, joined or left midyear, or supported several projects. A single annual percentage may obscure those changes unless the records support it.
Use records that describe the work.
Time records can be helpful, but they are most useful when the codes and descriptions are understood. Combine them with project plans, experiment logs, engineering tickets, design reviews, and factual explanations from people familiar with the work. An entry labeled development should lead to a specific activity rather than end the inquiry.
- Identify the employee, payroll period, and relevant project.
- Describe the services and the source supporting them.
- Explain the allocation method and changes during the year.
- Keep excluded duties visible in the review.
- Reconcile the resulting schedule to payroll totals.
If time records are incomplete, discuss the evidence you do have. Our guide to R&D credits without timesheets explains how to approach gaps without inventing historical detail.
Review eligible wage amounts separately.
Identifying qualified work does not establish that every employment cost is a qualifying wage. The statutory wage definition and applicable exclusions must be considered separately from the activity allocation (IRC §41(b)(2)(D)). Provide payroll detail that distinguishes compensation categories rather than only a departmental total cost.
Also distinguish employees from outside service providers. Contractor invoices require a contract research review; they should not be folded into an employee wage schedule. Flag owner compensation, unusual payroll items, and overlapping tax-credit claims for your tax preparer's review.
Get help identifying eligible employee costs.
Paribus Advisors evaluates qualified research expenses and prepares supporting study workpapers. We review employees’ activities alongside payroll records and explain which costs were included, excluded, or still need clarification.
For an initial call, describe the work, the team involved, and your available records. You can begin without a preselected wage percentage or credit estimate. Call to discuss how an employee-cost review would fit into your R&D study package.
More help with your R&D credit.
See how employee costs fit within qualified research expenses, including the distinction between supported costs and the credit amount.