ERC Claim Stalled With a PEO? What Employers Need to Know and Do Now

The employee retention credit (“ERC”) continues to generate headaches for businesses, and claims filed through professional employer organizations (“PEO”) are among the most problematic.  Many businesses that relied on a PEO to file their ERC are now confronting delays, gaps in information, and uncertainty about whether the IRS has paid the credit—or whether it was claimed correctly, or filed at all.  This blog outlines how PEO arrangements affect ERC filings, the transparency challenges that result, and practical steps businesses can take to protect themselves and potentially accelerate resolution.

How PEO Relationships Affect ERC Filings

In a nutshell, a PEO is third-party service provider that provides a wide range of services including payroll, employment tax filings, and related compliance. Many PEOs claim to be a “co-employer” with the business and file employment tax returns (941 or 941-Xs) using its own “EIN that include wages or compensation paid to the individuals performing services for the” business that is utilizing the PEO’s services.  PEOs that report “wages on behalf of their clients must file an aggregate Form 941, with Schedule R (Form 941) attached.”  The fact that the PEO reports its clients’ wages under its own EIN means a business using a PEO was required to go through its PEO to claim the ERC even though the business (and not the PEO) is entitled to the ERC. 

This relationship has two critical implications for the business claiming the ERC.  First, because the PEO files under its own EIN, a business that wants to claim the ERC for quarters processed by a PEO must do so through the PEO’s amended payroll filings.  Second, although the ERC economically belongs to the business, the filing mechanics are controlled by the PEO.  That separation has created significant transparency issues.

The Transparency Problem

In normal situations, where a business claims the ERC using its own EIN on its own 941 or 941-X, the business has full understanding of the facts of the filing. It knows when the claim was made, the amount of the claim, the basis for the claim, the status of the claim (i.e. has the claim been denied or paid), and the amount of the claim paid.  In a PEO filing, those details sit with the PEO, not the business who is entitled to the ERC. As a result, businesses lack visibility into basic, but essential, information such as whether and when the ERC claim was made, whether the ERC was denied, the basis for that denial, and whether the IRS has paid the ERC (and with the correct interest paid).  This opacity makes it nearly impossible for a business to monitor the status of its ERC.

Information to Request from Your PEO

To gain insight into the status of your ERC, businesses should formally request key documents and data from their PEO.  The objective is to verify that the ERC was timely and correctly claimed, to determine the current IRS status, and to confirm whether any payment has been received but not paid to the business.  At a minimum, request the following:

1. The dates the PEO filed any Forms 941‑X and related Schedules R claiming the ERC on your behalf, along with proof of filing, such as certified mail.
2. Copies of the Schedules R and the Forms 941‑X reflecting your business’s ERC claim.  Redaction of other clients’ information is appropriate, but information related to your ERC claim should be unredacted.
3. IRS account transcripts for the PEO’s Forms 941 for the quarters that include your ERC claims so you can see when 941-Xs were filed and when or if the ERC was paid.

With this information, you can evaluate whether the your ERC claim was filed, in the correct amounts, and on a timely basis; whether the IRS has approved or denied the claims; and whether any refunds and interest were received and paid to you.

What to Do With the Information

Once you have the documents from the PEO, analyze them against your ERC calculations and supporting documentation.  Pay particular attention to timing (including statute of limitations considerations), credit computations, and any IRS transcript flags (was a claim denied and not appealed?).  Given the volume of ERC scrutiny and the added complexity of aggregate filings, it is not uncommon to uncover issues such as late or missing filings, miscalculated credits, or refunds issued to the PEO but not yet paid to the business.

Potential Remedies if the PEO Mishandled the Filing

If your review indicates that the PEO failed to file, filed late, miscalculated the ERC, did not respond to IRS requests, or failed to pay you the full amount of the ERC and interest, you may have contractual and other legal remedies.  Depending on the facts and the terms of your PEO agreement, potential claims could include breach of contract and damages associated with lost credits or interest, disallowed claims, or failure to file on your behalf.  Preserve evidence and consider engaging counsel to assess strategy and recovery options.

Bottom Line

ERC claims filed through PEOs present unique visibility and control challenges that can delay or jeopardize ERC claim.  Businesses should proactively obtain the full ERC filing record from their PEO, verify accuracy and status, and take swift action to correct errors or recover amounts due.  If the PEO mishandled the process or failed to remit payments, remedies may be available to make the business whole.