US Tax Court Rules PEOs Ineligible for WOTC and EZEC Tax Credits

The US Tax Court has ruled that Professional Employer Organizations (PEOs) are generally ineligible for specific federal tax credits, marking a significant legal shift for the industry. In the case of Barrett Business Services, Inc. (BBSI) v. Commissioner, the court determined that only common law employers qualify for WOTC and EZEC credits. The ruling was based on the finding that BBSI did not exercise day-to-day supervision over employees at their respective worksites, a prerequisite for claiming these incentives. This decision clarifies that PEOs are not considered statutory employers for the purposes of these specific income tax credits. The outcome sets a negative precedent that could lead to higher effective tax rates and increased operational costs across the PEO sector. For BBSI specifically, the denial of these credits represents a bearish development that may impact its future financial performance and valuation.