Is your business prepared to e-file? That is a question today’s businesses, including smaller employers, should be asking themselves as the Internal Revenue Service is proposing to reduce the number of returns that a business can prepare before e-filing is required for information returns like W-2 and 1099 forms.
A public hearing was held on Sept. 22, 2021 to listen to comments and, now, the IRS is in the process of reviewing the comments and determining if any changes should be made to the proposed regulations before finalizing.
If adopted, the regulations would impact a significant number of businesses. Let’s take a closer look.
In July 2021, IRS proposed regulations that would lower the e-file threshold for information returns from 250 returns to 100 returns for tax year 2021 (filed in 2022) and then further reduced to 10 for tax year 2022 returns (filed in 2023). These regulations apply not only to Forms W-2 and 1099, but also to Form 1042-S, 1095 series, 1098 series, and 5498 series forms.
Secondly, the proposed regulations eliminate the non-aggregation rule. Currently, the 250-return threshold is based on form type. For example, if a filer has 300 1099-DIV forms to file and 200 1099-INT forms to file, the filer is only required to file the 1099-DIV forms electronically since the volume is 250 or more. This filer would not be required to file the 1099-INT forms electronically because the volume is less than the threshold.
Under the proposed regulations, the filer would combine the total number of forms to be filed and, if the total is more than the e-file threshold number, then all forms would have to be filed electronically regardless of the number per form type. So, if the e-file threshold was lowered to 100 and a filer had 30 W-2s, 50 1099-MISC forms, and 50 1099-NEC forms, this filer would be required to file all three form types electronically.
Furthermore, the proposed regulations require corrections to be filed in the same manner that the originals were filed. This means that if a filer submits originals on paper; corrections must be filed on paper as well. If a filer submits originals electronically; corrections must be filed electronically. Failure to file a correction in the same manner as the original was filed would result in penalties.
Clearly, when the threshold is lowered to 10 returns, this change, if adopted, will impact a significant number of filers, especially since the non-aggregation rule will be eliminated. Consider this: Even if a small business has only five employees, but also hires five independent contractors (reporting $600 or more in income), that business would have to comply with the e-file threshold. The bottom line: Only the very small filers would not be impacted.
Are there any exceptions? Yes. In cases of undue hardship, the proposed regulations do allow for a waiver of these requirements. The principal factor in determining hardship is if the cost of filing electronically exceeds the cost of filing on paper. It should be noted that if an employer is closing a business and needs to file Forms W-2, 499R-2/W-2PR, W-2VI, W-2GU, or W-2AS before the release of the e-file specifications, this is also considered a hardship.
Why a Lower E-File Threshold?
The proposed regulations are in line with a provision of the Taxpayer First Act of 2019, which required the IRS to modernize its technology, improve taxpayer service, and enhance its cybersecurity to reduce identity theft.
Within its broad-sweeping changes, the Taxpayer First Act gave the IRS authority to issue regulations to lower the e-file threshold and encouraged the IRS to require more businesses to e-file their information returns.
“E-file is the preferred filing method by both IRS and the Social Security Administration because it is more efficient and less costly to process. Since it is quicker to process data from an e-filed return versus a paper return, this also means that the data is available sooner to be used to validate that information reported on an income tax return matches data provided from the information return, which helps to better detect fraudulent returns,” said Janice Krueger, subject matter expert for Greatland.
While the proposed regulations have not yet been formally adopted, businesses should act now to prepare and better position themselves for this likely change. This includes working with a vendor that can effectively meet all of their information reporting needs given the complexities and ever-changing landscape of rules and regulations.
“A substantial number of businesses will be impacted by the lower e-file threshold, especially when the threshold is lowered to 10. For most businesses their core competency is not filing information returns; therefore, it is in their best interest to find a vendor who can meet all of their information reporting needs including federal, state, and recipient filing for all form types so that they can focus on their primary business objectives and avoid potential penalties,” Krueger said.
It should be noted that the current penalty for filing on paper when a business is required to file electronically can be as much as $280 per return. This may not seem like much but it can quickly add up and prove significant if a business has a fair number of returns not filed in the proper manner.
Unless they have a combined total of less than 10 information returns to file, all businesses should be prepared to e-file when the regulations are finalized, not just for Forms W-2 and 1099, but also for Form 1095.
Employers can certainly choose to e-file their returns themselves; however, given the complexities in doing so and the time involved, many will find it easier and more cost-effective to turn to a third party to meet all of their e-file requirements.
Consider, for example, a comprehensive online 1099 and W-2 reporting platform like Yearli.com by Greatland. Yearli.com supports e-filing not only for federal filing through the three systems for which businesses would need to be prepared to file returns, but it also handles state filing. In addition, Yearli.com offers a print and mail service that sends copies of the information returns to the recipients and employees.
Furthermore, Yearli.com has a year-around compliance staff that remains in close contact with federal and state agencies to help ensure compliance at both the federal and state levels. And it offers three service options so businesses can easily find a solution that best fits their budget and needs.
Don’t be left unprepared. IRS’ proposed regulations will, if adopted, impact a significant number of employers. Act today to ensure your business is in compliance.