Is Your PEO Claiming Your Tax Credits?

Here's something most business owners inside a PEO never think to ask: who's claiming your tax credits?

When you're in a PEO, the PEO typically files payroll taxes under their own Employer Identification Number (EIN) as the employer of record. That's the whole co-employment model. But it has a side effect that can cost you thousands of dollars per year: federal and state tax credits that your business earned may be claimed by the PEO, not by you.

This isn't theoretical. It's a structural feature of the PEO model that most companies never examine until they leave.

Which Tax Credits Are at Risk?

Work Opportunity Tax Credit (WOTC)

The WOTC provided federal tax credits of $2,400 to $9,600 per eligible hire when companies hired individuals from certain target groups, including veterans, long-term unemployed individuals, and SNAP recipients. The program was authorized through December 31, 2025. As of early 2026, WOTC has expired for new hires. There is bipartisan legislation in Congress to extend and expand it, but as of now, no extension has been signed into law.

Here's why this matters for PEO clients: if WOTC is extended (which it has been repeatedly in the past), your PEO will be the employer of record filing the paperwork under their own EIN. That puts them in the position to claim the credit, not you. Many PEOs didn't even screen new hires for WOTC eligibility, meaning companies missed the credit entirely.

For companies that hired frequently while inside a PEO during the years WOTC was active, especially in hospitality, retail, logistics, and healthcare, there may be unclaimed credits worth examining with your CPA.

FICA Tip Credit

If you're in the restaurant, bar, or hospitality industry and your employees receive tips, you may be eligible for the FICA tip credit. This offsets the employer share of FICA taxes on tips above the federal minimum wage. It's a dollar-for-dollar tax credit, which makes it especially valuable.

Inside a PEO, this credit may be retained by the PEO or not properly assigned to your tax account. If you're running a restaurant group with 80 tipped employees and nobody is tracking this credit, you could be leaving $50,000 or more on the table annually.

Research and Development Tax Credit

The R&D tax credit is one of the most valuable and currently active federal incentives. Following the One Big Beautiful Bill Act (OBBBA) signed in July 2025, companies can once again immediately expense domestic research and development costs in the year they're incurred, reversing the unpopular 5-year amortization rule that was in effect since 2022. Eligible small businesses with less than $5 million in gross receipts can apply up to $500,000 of their R&D credit against payroll taxes annually, even without income tax liability. This is particularly powerful for growth-stage companies.

Inside a PEO, the R&D credit gets complicated. Your payroll is filed under the PEO's EIN, which can lead to credits being misallocated or missed entirely if the PEO doesn't coordinate with your CPA. Leaving the PEO and filing under your own EIN gives you direct control over claiming and applying R&D credits, including the payroll tax offset.

State and Local Credits You Might Be Missing

Beyond federal credits, states offer their own incentive programs for hiring, workforce training, R&D, and business expansion. These are designed to benefit your business directly, but many of them require the employer to file under their own state tax ID. If your PEO is filing on your behalf under their ID, you may not be receiving credits that were intended for you.

Some examples: California offers the New Employment Credit and workforce training grants. Georgia has a Job Tax Credit and Retraining Credit. Texas offers the Skills Development Fund. New York, Florida, Louisiana, and Arizona all have their own hiring and R&D incentive programs. Every state is different, and the eligibility often depends on who is technically the employer of record.

What to Do About It

If you're staying in your PEO (for now)

Pull out your PEO contract and search for clauses related to tax incentives, WOTC, hiring incentives, assignment of benefits, and employer of record responsibilities. If the contract doesn't explicitly assign tax credits to your company, you have a problem. Raise this with your PEO directly and get it in writing.

Ask your PEO whether they screen new hires for WOTC eligibility. If they don't, you're missing credits every time you hire someone from a qualifying group. Ask whether FICA tip credits (if applicable) and R&D credits are being passed through to your tax account.

Work with your CPA to review your last few years of tax filings and identify whether any credits were claimed on your behalf or missed entirely.

If you're planning to leave

When you exit a PEO and file taxes under your own EIN again, you regain full control over every tax credit your business earns. R&D credits, FICA tip credits, state incentives, and WOTC (if Congress extends it) all flow directly to you. There's no ambiguity about who the employer of record is, because it's you.

This is one of the less obvious but financially significant benefits of leaving a PEO. Depending on your industry, the recovered and future tax credits, combined with the savings from unbundling your benefits, workers' comp, and admin fees, can add tens of thousands of dollars per year to your bottom line.

The Bigger Picture

Tax credits are one piece of a larger pattern. Inside a PEO, you trade control for convenience across almost every dimension: benefits pricing, workers' comp, EPLI, HRIS, compliance, and tax credits. Each one has a cost that's hard to see from the inside because PEO invoices aren't built for transparency.

The tax credit issue is particularly frustrating because these are incentives the government created specifically to benefit businesses like yours. Hiring credits for bringing on veterans. R&D credits for investing in innovation. State incentives for growing your workforce. When those credits flow to the PEO instead of your balance sheet, you're subsidizing someone else's business model with money that was meant for you.

Whether or not tax credits alone justify leaving your PEO depends on your situation. But they should absolutely be part of the analysis. And if you've never looked at your PEO contract to see who owns your credits, now is the time.

Next Steps

Talk to your CPA about your current tax credit exposure. Pull your PEO contract and read the employer of record clauses. If you're considering a PEO exit, factor the tax credit recovery into your financial analysis alongside the savings on benefits, admin fees, and workers' comp.

We include tax credit considerations in every PEO exit analysis we run. It's part of showing you the complete picture of what staying in a PEO actually costs, not just the invoice number, but everything around it.