By Chris Babigian and James Tehrani
Does it feel like déjà vu all over again?
Professional Employer Organizations (PEOs) have been asking that very question about the Employer Retention Tax Credit (ERTC). The same issues have been going on for four years now, so why should 2024 be any different?
The top news story for PEOs is the ERTC. As it had been in 2023 … and 2022 …. and 2021 … and 2020. Waking up and reading the latest news in your inbox can feel like Groundhog Day. You might recall, that’s the 1993 film where Bill Murray’s character endlessly gets to relive his day. Yep, the ERTC is kind of like that.
Even so, with recent directives from the IRS and pending legislation, things are a little different this time around.
In the Beginning
The ERTC was established as part of the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and it was created with the best of intentions—to keep people employed and small businesses afloat during COVID-19. The pandemic led to an estimated 200,000 additional business closures in the first year of the outbreak, so protecting SMBs became paramount.
In 2020, when the ERTC first went into effect, the credit was nice but modest. For businesses with 100 or fewer employees, companies could get a credit of up to $5,000 per employee. In the early days, companies could claim an ERTC or take out a Paycheck Protection Program (PPP) loan. But by the end of the year, the rules had changed, and then shortly thereafter, they changed again. Some employers were now entitled to an additional ERTC credit of up to $7,000 per employee for each and every quarter of 2021. Moreover, companies could now receive the credit on top of a forgivable PPP loan – a big win for struggling small businesses.
PEOs Lead the Way
From Day One, PEOs got to work trying to do the right thing in the right way for their small and medium-sized business (SMB) clients that were struggling. With shelter-in-place directives in many parts of the country, businesses were hurting, and the economy was struggling with an unemployment rate reaching nearly 15% in April 2020. Still, the PEO industry was working overtime in real time through nuances of new, complex calculations and reporting requirements that were ever-developing and ever-evolving. It wasn’t easy, but they rolled up their sleeves and got to work for their clients. All while facing their own pandemic-induced challenges and concerns.
We can’t speak for every business, but most PEOs helped their clients file for the ERTC as part of their normal business operations. Helping SMBs is what PEOs do best after all.
But as the ERTC started to really catch on, the narrative began to change.
Fly-by-Nights Fly In
While PEOs have been helping SMBs with the claims process since the beginning, there has been an influx of other companies, fly-by-night and otherwise, in recent years looking to help SMBs as well. Some are indeed helpful; others are not. When there’s big money at stake, the chance for scams and fraud grows.
The IRS warned last year that scammers “might charge a big fee to ‘help’ you claim the credit. They line their pockets and leave you with big tax issues because if you claim the credit when you don’t qualify for it, you have to pay it back.”
As of September 2023, the IRS said it paid more than $230 billion to employers claiming the ERTC when the initial estimate was supposed to be $55 billion. Of the $230 billion paid, investigators were already looking into almost $3 billion worth of suspicious claims. It’s no wonder that the IRS listed the ERTC at the top of its “Dirty Dozen” tax scams and schemes for 2023.
A Backlog and Then a Bigger Backlog
This unrelenting influx of new, sometimes questionable, claims created a quagmire for the IRS, and, in turn, small businesses. As we wrote last year, there was a severe backlog for businesses hoping to cash in on the ERTC. While that number started to dissipate in June to under 400,000 outstanding claims, it rose again to over 1 million by the end of the year. Even though the original goal was payment within 90 days, commenters on one Reddit forum from last April said the wait to receive the credit was six months or longer. The wait would get even longer than that as the year progressed.
Last September, the IRS put an immediate moratorium in place on ERTC processing until at least Jan. 1, 2024, and even created processes for returning funds improperly claimed. The IRS also gave businesses, including PEOs, the option to withdraw claims. Legislation now making its way through Congress would, if passed, establish a deadline of Jan. 31 to file any new claims.
Like they say in Vegas, “No more bets.”
The PEO Predicament
These long credit processing times have posed a unique challenge for the industry. As client claims are filed on PEO aggregate Form 941 returns, PEOs serve as the middleman between their SMB clients—that are desperately waiting for a credit refund—and the IRS who has them. This unenviable position is compounded by the potential for many SMB claims to exist on a single, unprocessed return.
Now, PEOs are also caught in the crosshairs of the fraud-induced IRS enforcement ramp up. On Dec. 1. 2023, the IRS issued a memo to the “CPEO Community” that seemingly encourages the withdrawal of existing ERTC claims and tries to dissuade them from making further claims. The letter in part suggests CPEOs are “solely liable” for “employment tax liabilities, including amounts from incorrect ERC claims.”
PEOs have been helping SMBs with their ERTC claims because it’s the right thing to do for their clients. Holding them liable for penalties or the repayment of credit funds, in the possession of their clients, that were claimed based on inaccurate client information, just doesn’t add up.
As NAPEO rightfully pointed out in a letter to the IRS: The new policy is “at odds with a 2021 congressional directive regarding tax credit liability.” New NAPEO President and CEO Casey Clark added in the letter that: “(T)he only outcome that makes sense from a fairness and tax administration standpoint is for the client employer to be held responsible for any errors and improper claims resulting from the information provided by the client to its CPEO or PEO.”
Recently, Rep. Jason Smith (R-Missouri) introduced a bill that would differentiate valid ERTC claims from CPEOs from fraudulent ones. Supported by NAPEO, the bill seemingly strikes a balance that both respects the initial ERTC promise to SMBs while addressing the bad actors who exploited it. But with 1 million claims still pending, the conclusion to the ERTC story is still unclear.
And you thought Groundhog Day was right around the corner? Nope; when it comes to the ERTC, it’s already here. There’s a lot at stake for SMBs and PEOs in 2024, and we’ll be keeping a close eye on how this all plays out.
Chris Babigian is PrismHR’s compliance strategy manager. A graduate of Boston University School of Law with a focus in taxation, Chris spent five years handling motions, appellate briefs and trial discovery for a civil litigation firm. In 2014, Chris transitioned to PrismHR, where he translates regulatory requirements into software solutions.
James Tehrani is PrismHR’s digital content marketing manager. He is an award-winning writer and editor based in the Chicago area.