Reconciling R&D wage expenses to payroll records is an important part of supporting the wage component of qualified research expenses. This page explains how to reconcile wage QREs to payroll records. It is educational and is not individualized advice. For the wage framework, see our page on employee wages.
Why Payroll Reconciliation Matters
Payroll reconciliation helps support the accuracy of the wage QREs by connecting them to the underlying payroll records. The IRS has noted that studies relying on manager recollection without supportable records can fail to establish the required connection. Reconciliation helps establish that connection.
What to Reconcile
The wage QRE reconciliation involves:
- Total wages — the total wages paid to each employee.
- Qualified services — the portion of wages attributable to qualified services (engaging in qualified research, direct supervision, or direct support).
- Time allocation — the allocation of time between qualified services and other work.
- Project nexus — which business components and qualified activities the employee worked on.
For more on wage allocation, see our page on wage allocation documentation.
How to Reconcile
A useful reconciliation approach involves:
- Identify the wage QRE total — the total wage QREs for each employee.
- Identify the payroll total — the total wages from payroll records for each employee.
- Connect QREs to payroll — connect the wage QREs to the specific payroll records.
- Document the allocation — document how the wage QREs were allocated (time records, project assignments, allocation methodology).
- Address differences — explain any differences between the wage QRE total and the payroll total (e.g., excluded wages, allocations).
Hypothetical Example
Consider a manufacturer that has wage QREs of $300,000 for an engineer. The company reconciles this to payroll records by showing the total wages from payroll ($400,000), the allocation methodology (75% to qualified research based on project assignments), and the resulting wage QRE ($300,000). This reconciliation helps support the accuracy and nexus of the wage QREs.
This example is illustrative only.
Key Takeaway
Reconciling R&D wage expenses to payroll records involves connecting wage QREs to the underlying payroll records and supporting the time allocation with project nexus. Because reconciliation is fact-specific, professional review is appropriate.