Before you leave your PEO, read the ERTC fine print first.

Most business owners leaving a PEO never think to open the Employee Retention Tax Credit addendum they signed back in 2021. That oversight can cost a company leaving a PEO twenty percent of a credit they thought was already settled, years after the service agreement ended. Here is what the agreement usually says, what the IRS will and will not do about it, and what to check before you give notice.

The setup: why your PEO is still in the ERTC picture

When a company uses a PEO, the PEO files Form 941 under its own Employer Identification Number on behalf of every client, with Schedule R allocating the credits client by client. The client does not file its own 941 and cannot claim the ERTC directly. The IRS has been clear about this in writing since 2022.

That structural quirk is the reason the PEO stays in the ERTC picture long after you terminate. The IRS sends the refund to the PEO, not to you. The PEO then has to forward the money to your company, minus whatever fee the addendum allows.

The IRS 2022 Information Letter (Letter 2023-0001) put it plainly: after the IRS processes the ERC, the PEO is responsible for making sure each client receives any credit or overpayment owed to the client. That sounds reassuring. It stops being reassuring once you read the follow-up.

What the addendum usually actually says

Most companies signed a separate ERTC addendum somewhere between 2021 and 2023, often as an attachment to a broader COVID-era amendment to the master service agreement. The language varies, but three patterns are common.

1. Percentage fees tied to the credit amount

A typical clause charges the PEO a service fee expressed as a percentage of the credit recognized. We have reviewed real addenda with language along these lines:

That 20% applies after termination. It applies regardless of when the IRS actually processes the claim, which given current IRS backlog could be a year or more after the money was nominally "earned." And it is net of quarterly fees, which opens a second layer of math most clients do not scrutinize.

The IRS has publicly flagged percentage-of-refund fees as a warning sign for ERC promoters generally. The PEO context is different because the PEO is the filer of record, not an outside promoter, but the fee pressure is the same.

2. Post-termination survival language

The second common pattern is language that explicitly survives termination. Something like: "This addendum, and any obligations accruing under it, shall survive termination of the Service Agreement." That one sentence is what lets the PEO bill you two years after you have moved your payroll, benefits, and HRIS to a standalone setup.

3. Exclusive agent language

The third pattern is a clause designating the PEO as the exclusive filer for any pre-termination period. This matters because under the IRS framework, you literally cannot file your own ERTC claim for any quarter you were in co-employment. Only the PEO can. The addendum just ratifies what the tax code already forces.

The fee is not the only risk

If the fee were the whole story, this would be a simple arithmetic problem. It is not. The bigger exposure for companies with unresolved ERTC claims comes from three compounding factors.

The audit window just got longer

The One Big Beautiful Bill Act, signed July 4, 2025, extended the statute of limitations for ERTC audits on third and fourth quarter 2021 claims. Previously the window closed April 15, 2027. Under OBBBA, it runs to six years from the filing date or April 15, 2028, whichever is later.

If you left your PEO in 2023 thinking the ERTC story was done, it is not. You are still on the hook for documentation and joint liability through at least 2028.

Joint liability for improper claims

IRS Chief Counsel Memorandum 2024-001 made the joint liability position explicit. If the IRS disallows a credit the PEO claimed on your behalf, both the PEO and the client are liable for the employment taxes owed. You do not escape just because your PEO filed the paperwork.

This matters more now than it did in 2022. Aggressive ERC mills convinced many companies they qualified when they did not. Some of those claims were filed through PEOs. If the IRS comes back, the PEO has every incentive to point at you and vice versa. The joint liability rule means the IRS can pursue whichever party has the deeper pocket.

Retroactive disallowance

OBBBA did something harsher than just extending audits. It retroactively closed the program for certain late filers. Specifically, claims for Q3 and Q4 2021 that were received by the IRS after January 31, 2024 are disallowed, full stop.

This created a live problem for PEO clients whose PEOs promised to file by the deadline and filed later. If your PEO told you it was submitting your amended 941-X for those quarters before January 31, 2024, and the actual filing date was February 2024 or beyond, the claim is dead. Whether the PEO owes you anything for that failure is a contract question buried in the same addendum you never read.

What to pull from your files this week

If your company is considering a PEO exit, or has already exited and still has ERTC claims in various states of processing, here is the short list of items that need to be on your desk before you do anything else.

1. The ERTC addendum itself. The exact document you signed. If you cannot find it, request a PDF copy from your PEO in writing. Do not accept a link to a portal you could lose access to after termination.
2. The fee structure. Specifically the percentage, what it applies to (gross credit or net of PEO fees), and whether it survives termination.
3. The filing record. For each eligible quarter, the date the PEO filed the amended 941-X, the amount claimed, and any IRS correspondence received.
4. The pass-through history. If the PEO has already received refunds on your behalf, the amount received, the amount passed through to you, and the fee deducted. Reconcile those numbers.
5. Your eligibility documentation. Government orders, gross receipts comparisons, and your eligibility analysis. Keep this through at least April 2029, probably longer.

The bigger lesson for exit planning

The ERTC problem is a specific instance of a broader issue with PEO exits. Co-employment structures create tail liabilities that outlive the service agreement. Employment taxes, workers' compensation claim runout, unemployment experience rating, and tax credits all have multi-year windows in which the PEO and the client are entangled even after the relationship ends.

None of these are reasons to stay in a PEO that is no longer serving you. They are reasons to exit with documentation, clean reconciliation, and a clear-eyed view of what the tail looks like. A company that saves $150,000 a year by leaving a PEO can still lose ground if it signs a termination notice without understanding what credits, refunds, and liabilities it is leaving behind.

The companies that exit cleanly are the ones that treated the agreement as a legal document from day one, not as boilerplate they scrolled past to get to signature. If that is not how you handled the ERTC addendum in 2021, now is the moment to fix it.