BARRETT BUSINESS SERVICES INC

The following risk factor presents a material update and addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on February 26, 2026. The risks and uncertainties described in the 2025 Annual Report on Form 10-K continue to be present and should be carefully reviewed. Additional risks and uncertainties that we currently believe are immaterial or of which we are currently unaware may also adversely affect our business operations, financial condition, or operating results.

Failure to interpret and comply with applicable federal and state payroll tax and unemployment tax laws could materially adversely affect our business, reputation, results of operations and financial condition.

As the administrative employer in our co-employer relationships with our clients, we are subject to a complex and evolving set of federal, state and local payroll tax laws and regulations, including requirements related to withholding, reporting and remitting payroll taxes on behalf of our clients. Compliance with these laws requires significant resources, and failure to comply with payroll tax laws in any jurisdiction in which we operate could subject us to financial penalties, interest charges and other liabilities. As new tax laws and regulations are adopted— including recently enacted legislation such as the One Big Beautiful Bill Act—we must update and modify our systems and processes to address these changes. These updates require substantial time, investment, and operational resources, and expose us to an increased risk of errors or noncompliance during implementation.

Additionally, our clients may be eligible for various legislative and regulatory programs, including those established under the CARES Act and the American Rescue Plan Act, such as the Employee Retention Tax Credit (“ERC”), which use payroll tax credits or deferrals as the mechanism to provide benefits to small businesses and employees. When current and former clients utilize ERCs and other similar programs, the IRS has required the associated tax forms to be filed through the PEO. We have made such filings for many of our current and former clients claiming ERCs. These filings are currently under examination by the IRS to assess the eligibility of the ERCs claimed by our PEO clients. During the second quarter of 2026, the Company received a notice of proposed adjustment from the IRS that may result in the disallowance of up to approximately $54.6 million of credits previously paid to client companies. The Company initiated the IRS administrative appeals process and is contesting the proposed disallowance.

Determining eligibility for ERCs and other programs is complex and is based on company-specific data that PEOs do not possess for their clients. Notwithstanding that PEOs do not determine eligibility for such credits and do not receive the economic benefit of such credits, the IRS has taken the general position that certain third-party payors, including PEOs, as well as their clients, are responsible for repaying disallowed tax credit claims under the ERC program. While we disagree with the IRS’s position and our clients are contractually and statutorily responsible for repaying any disallowed tax credits previously paid by the IRS, recovery from our clients cannot be assured. Failure to recover a significant amount of disallowed tax credits from our clients where the IRS seeks to hold BBSI liable likely would have a material adverse effect on our business, reputation, results of operations, and financial condition.