Direct state reporting obligations can quickly become complicated for any business, and if done incorrectly, state penalties can add up rapidly. Direct state reporting has been required by many states for decades, however, only recently have we seen states increase enforcement surrounding their reporting requirements.
States that participate in the Combined Federal State Filing (CF/SF) program will likely continue moving away from solely requiring CF/SF submissions and implementing their own direct reporting requirements (on top of CF/SF) in the coming tax years. As states continue to receive inaccurate information (or not receive any information), their next step will be to increase enforcement by issuing audits and penalties, which can prove costly to any business. These penalties can add up quickly, especially if your business has obligations in several states and/or files more than one type of 1099 form.
Below are four tips to avoid inaccurate reporting and subsequent penalties.
Know when CF/SF satisfies filing requirements and when it doesn’t
The CF/SF program was created to ease the complications of direct state reporting on small businesses. However, the program has displayed many challenges to states, causing them to require additional reporting requirements. Currently, 30 states participate in CF/SF but not all are satisfied by its filings. For example, Form 1099-NEC has direct reporting requirements in 37 states. Even though 30 states participate in the CF/SF program, only eight states will be satisfied by the program’s filings.
Understand all state obligations
If your company reports to the IRS, the likelihood of state reporting obligations is high. Knowing which states require direct reporting and knowing what those specific obligations are can be a complex process. However, understanding those details and avoiding state reporting misconceptions are key to avoiding penalties and inaccurate reportings. Remember that even if your business is incorporated in a state that does not require direct reporting, it doesn’t mean you don’t have any direct reporting obligations.
Keep track of state requirements, thresholds, due dates
Reporting your business’ 1099s directly with states can become more complex than reporting to the IRS because of the individual regulations that states are able to set. Each state can require different filing methods, due dates and thresholds for each 1099 it requires. For example:
- Delaware has a due date of January 31 for Form 1099-NEC, but for Forms 1099-MISC and 1099-R, the due date is February 28 if filing on paper or March 31 if filing electronically. While Delaware participates in the CF/SF program, direct reporting for Forms 1099-MISC and 1099-NEC are required if issued to a Delaware resident or if issued to a non-resident for services performed in Delaware. Note: Businesses that have Delaware reporting obligations can face a penalty of $50 per return for inaccurate filings, with a max of $1.5M per calendar year.
- Indiana has a due date of January 31 for all 1099s that are required to be reported directly to the state. Additionally, all forms are only required if state withholding is applied. Note: Businesses that have Indiana reporting obligations can face a penalty of $10 per return for inaccurate filings, with a max of $25,000 per calendar year.
Watch for changes
Reporting changes can happen at any time throughout the year. States tend to release reporting requirements very late, with little turnaround time for filers to catch up. For example, Louisiana released its latest 1099-NEC filing requirements on January 12, 2023, even though the requirements were to be implemented starting January 1, 2023.
Remember that each individual state with direct reporting requirements can charge penalties for inaccurate filings, late filings or for not filing at all. For example, in California there is a penalty of $50 per return ($250,000 annual max) and in Massachusetts the penalty is $100 per return. In New York, the penalty is $50 per return with a $100K annual max.
If your business has reporting obligations in several states, the complexity increases and so does the possibility for penalties. Ensure you have a process or solution in place to file your state reportings timely and accurately to avoid costly penalties to your business.
To learn about Sovos’ state reporting offerings, talk to one of our experts.