Navigating PEOs, ERC Refunds, and IRS Liabilities

Navigating PEOs, ERC Refunds, and IRS Liabilities

Are you working with a Professional Employer Organization (PEO) that has an outstanding IRS liability? If so, you may face challenges in receiving the Employee Retention Credits (ERCs) that you are entitled to.

Recent Development from the IRS

On May 12, 2023, the IRS released CCA_2023031609200704, which includes internal emails from March 2023. These emails delve into the IRS’s capacity to apply ERCs to existing tax liabilities of a PEO. As many know, PEOs commonly offer services such as acting as paymasters, W-2 filing, and human resource management for their clients.

The Process for Eligible Employers

If your business is categorized as an Eligible Employer under the ERC rules and collaborates with a PEO, the PEO will handle the ERC refund claim on your behalf. This claim will be reflected on Schedule R of the PEO’s Form 941. Once the IRS refunds these credits to the PEO, the specific contractual agreement between your business and the PEO dictates how these credits are transferred to you.

Interested in learning more about qualifying as an Eligible Employer or the process of filing ERC refund claims? Explore Our ERC Resource Guide.

Key Takeaways from the IRS Announcement

The internal email correspondence provides several crucial insights:

  • Discretionary Power: The IRS can use any overpayment (like an ERC refund) to offset a PEO’s unpaid tax liability, as per Section 6402(a).
  • Handling of COVID-19 Credits: The IRS may use excess refundable COVID-19 employment tax credits to offset any existing tax liabilities.
  • PEOs and Wage Payments: When a PEO pays wages as part of a service agreement, the credits claimed on Form 941 Schedule R correspond to wages paid to a client’s employees. Here, the PEO is the entity that claims the employment tax on its Form 941.
  • Ensuring Proper Refund Distribution: If the PEO receives a refund, both the PEO and the client must work together to guarantee the correct refund portion goes to the client.
  • IRS’s Position on Agreements: The IRS is not involved in these agreements and has no legal duty to refund any part of the PEO’s refund to a client listed on Schedule R.
  • IRS Audit Process: If the IRS audits a Form 941 submitted by a PEO, they review the overall line-item credit claimed by the PEO, based on the client-specific details on Schedule R.
  • Civil Matters Between PEO and Client: The IRS’s email underscores that ERC refund payments between a PEO and a client remain a private matter.

It’s essential to recognize that these internal emails are not binding guidelines but do reveal the current IRS standpoint on these subjects. If your business uses a PEO and is eligible for the employee retention credit, it is wise to be aware of the IRS’s position and potentially reassess your agreement with your PEO.

How TC Services USA Can Assist

At TC Services USA, our seasoned team of ERC specialists is here to help you ascertain your eligibility for ERCs and review your claims. Partnering with us ensures that you navigate the complexities of PEOs, ERCs, and the IRS with confidence and expertise. Reach out to us today to see how we can support your business’s unique needs.

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