Liability for Payroll Taxes

Clarifying PEO and Client Liability

The IRS believes certified PEOs (CPEOs) are solely liable and PEOs are jointly liable for ERTC credits taken on their amended tax returns. NAPEO’s position is that this interpretation is inconsistent with the statute and congressional intent in creating such tax credits. In addition, PEOs do not have access to the information needed to verify the eligibility of their clients for payroll tax credits. 

From a fairness and tax administration standpoint, the liability for such claims should belong to the entity that initiates and benefits from the claim and should only be expanded to the PEO in cases of fraud or knowledge of an improper claim.

ABOUT H.R. 3223

Reps. Beth Van Duyne (R-TX) and Mike Thompson (D-CA) introduced H.R. 3223 in May 2025. It is co-sponsored by Reps. Jimmy Panetta (D-CA), Vern Buchanan (R-FL) and Rep. Terri Sewell (D-AL).

This legislation makes clear the liability for payroll tax credit claims made by PEO clients belongs to the entity that initiates and benefits from the claim, and is only expanded to a PEO in cases of fraud or knowledge of an improper claim.  The bill also lays out a clear, fair liability determination process by establishing that PEOs and clients are each solely responsible for the respective information they own. Additionally, H.R. 3223 instructs the IRS to release the approved payroll tax credits contained on an amended PEO return that are not being audited.

Specifically, H.R. 3223 makes a PEO liable for the following when filing a payroll tax credit for its small business customer:

• Properly reporting payroll taxes to their customers and filing an amended tax return with the payroll tax credit.
• Providing information requested by the IRS on an audited payroll tax credit.
• Any criminal or fraudulent activity a CPEO/PEO knowingly participates in regarding payroll tax credits.

benefits of H.R. 3223

• H.R. 3223 will speed up the payroll tax credit process for the small businesses we serve and clarify liability for improper claims.
• The bill will save the government billions of dollars by deterring tax fraud and discouraging false filings.
• It will also ensure that future tax credits will go to the businesses they were intended to help. Without H.R. 3223, thousands of small businesses will face financial hardship while the IRS needlessly holds up money they are lawfully entitled to.
• H.R. 3223 will enable PEOs to better serve the American businesses that are the backbone of the U.S. economy by sensibly resolving ongoing challenges PEOs have with payroll tax credit processing.