Did your business suffer a shutdown or have a serious drop in gross receipts during the COVID-19 pandemic? If so, you might qualify for the Employee Retention Tax Credit, or the ERTC. Many business owners claim the credit on their own, but if your company uses a certified professional employer organization (PEO), it will claim the credit for you on your behalf.

However, you may have issues if the PEO owes the IRS a tax liability. Here’s what to know about the ERTC for professional employer organizations (PEOs).

What Is a Professional Employer Organization?

A PEO is an organization that leases employees to businesses, allowing those businesses to outsource many of their human resources functions. For instance, a PEO handles employment taxes, payroll administration, benefits, and workers’ compensation insurance so the business doesn’t have to.

If your business uses a PEO, you’ll report wages paid to employees under the PEO federal employer identification number (FEIN). Then, employee liability shifts to the PEO.

PEOs can be appealing, especially for small businesses that can’t afford to staff their own HR departments. However, you may encounter a problem if you use a PEO to claim the ERTC. We’ll explain more about the ERTC for professional employer organizations (PEOs) below.

How Using a PEO May Affect Your COVID-19 Employment Tax Credits

As mentioned earlier, businesses that use a PEO can have the PEO claim the ERTC on their behalf. But if the PEO owes a liability to the IRS, the IRS can take what it’s owed from your refund.

The IRS has also cited the following propositions about the ERTC and PEOs:

  • According to Section 6402(a), the IRS has the discretion to credit any overpayment against “any liability in respect of an internal revenue tax on the part of the person who made the overpayment.”
  • For businesses using a PEO to handle payroll, credits claimed on Form 941, Schedule R are attributable to wages paid to a client’s employees. This means the PEO is the taxpayer that claims employment taxes filed under its own FEIN.
  • If the IRS provides a refund to the PEO, it is the client’s responsibility to ensure the PEO pays their business the proper amount.

More About the ERTC and How to Claim the Credit

If you haven’t claimed the ERTC yet, here’s how it works. Businesses can claim the credit for all wages paid to employees kept on payroll during 2020 and 2021, including their health insurance costs. If your business is eligible, you can claim a credit worth up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for 2021.

To qualify, you must meet one of the following conditions:

  • You had a big drop in gross receipts during the pandemic (at least 50% for 2020 and 20% for 2021).
  • A government order limiting travel, commerce, or group meetings forced your business to close, partially or fully.

To claim the credit, you must file  Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund with the IRS. The IRS won’t issue the credit automatically.

Contact Dayes Law Firm If You Have Questions About the ERTC

Understanding the ERTC for professional employer organizations (PEOs) can be challenging. If you use a PEO and are concerned your refund may be reduced because of a PEO’s tax liability, reach out to Dayes Law Firm at (800) 503-2000 for a free consultation. We can also tell you whether your business is eligible for the ERTC and help you file Form 941-X to claim the credit.