Editor’s note: This blog was updated on December 28, 2022
Update: Since this content was published, the IRS released guidance that the implementation of the reduced $600 threshold for 1099-K reporting will be delayed until tax year 2023. As a result, the federal threshold for the 1099-K form reporting for tax year 2022 will remain unchanged at $20,000 AND 200 transactions. Read our recent blog post for additional details on this federal change as well as state 1099-K reporting implications.
The 2022 1099 tax reporting season is rapidly approaching, and the changes and updates are still coming – from the IRS and states. How can you ensure you’re ready for the busy season in time? What are some best practices for ensuring your 1099 information is compliant? Here are four key ways you can stay up to date on the latest reporting requirements, as well as some best practices for paving the way for a smoother tax reporting season.
- Confirm 1099 data (names, addresses, TINs). Ensure your information is correct before reporting to the IRS. Check those name and TIN combinations against the IRS TIN matching database so you can fix issues before your organization files, avoiding backup withholding notices (i.e., B notices) and penalty notices (i.e., P notices). Reacting to B and P notice compliance requirements can be costly to your organization and create a negative client or payee experience. Proactively identifying name and TIN mismatches and cleaning up the discrepancies before filing 1099 information is best practice.
- Pilot the reporting process to ensure data is being produced as expected and that there are no errors. Whether it’s changes to the IRS and state requirements or changes to your own organizational systems and processes, it is important to perform a “dry run” of producing the 1099s for printing and mailing (a small sample should suffice) and for filing the information with the IRS and applicable states. Partner with experts like Sovos so you can benefit from the individual transmittal testing completed with the IRS and states, which ensures that files are not rejected during the critical filing times.
- Send electronic statements. Reduce the volume of customer service calls your company receives during tax season. Send electronic statements to your recipients so they have real-time access to the information. Last year, the Treasury Inspector General for Tax Administration reported a 40% slowdown of delivery time for First Class Mail. Proactively communicate with your recipients to limit the amount of reprint requests your company receives due to 1099s getting lost in the mail. Note that the IRS does require consent to send 1099s electronically to recipients, the requirements can be found here.
- Don’t forget to send 1099s to the states too. Over 40 states require some form of direct state tax reporting for various 10-series and W-2 forms. Some require filing at different thresholds, some don’t participate in the IRS sharing program (i.e., CFS) and even some that do participate in CFS still require your organization to directly file 1099 and W-2 information. Make sure you know which states your organization is obligated to report to directly versus through the CFS, and what those specific requirements are for each.
2022 regulatory changes
For the 2022 filing season, the IRS updated the penalties businesses can face for late or inaccurate reporting. Large businesses (Gross Receipts of more than $5 million) that do not file an accurate return by August 1 can face a penalty of $290 per return with a max penalty of $3.532 million. If the IRS determines that your organization is intentionally disregarding, the penalty is now $580 per return and there is no cap on this penalty.
This year’s Publication 1220 (released in September and October 2022) included information regarding IRS system modernization. Over the last year, the IRS transferred many of its systems behind the new Secure Access Digital Identification (SADI) portal. If your organization uses any IRS systems to file 1099 information (in FIRE) or Affordable Care Act (ACA) returns (in AIR), you will need to create a SADI account and ensure that your filing Transmitter Control Codes were transferred over.
There are also certain states that are modernizing filing systems for 2022 and beyond (e.g., Maine, Oregon). Ensure your login and passwords work for both Federal and State systems in which you have reporting requirements—before tax season.
If you send 1099s to the IRS on paper instead of filing electronically, your organization should be aware of pending e-file changes for tax year 2022 and beyond. In accordance with the Taxpayer First Act of 2019, the IRS is changing the threshold from 250 returns down to 10 returns. However, this regulation remains unchanged until further notice (as of November 2022). The current threshold remains at 250 or more of a single form type.
Changes to state reporting requirements are also something to keep in mind. The IRS shares 1099 information with some states, for some 1099 forms, but not all. For example, Form 1099-NEC was added to the CFS (Combined Federal/ State Reporting) program for 2022, but many states still require the information to be directly reported. Stay up to date with our state-by-state guides.
Form 1099-K threshold changes will be the big challenge for all third-party settlement organizations (TPSOs) for the 2022 filing season. The previous IRS requirement stated that TPSOs had to report Form 1099-K when the aggregate of payments paid to a payee in the calendar year was at least $20,000 and those payments were paid over 200 or more transactions. For 2022 returns and beyond, TPSOs must file Form 1099-K when the aggregate of payments paid to a payee in the calendar year is $600 and there is no transaction limit. This is to bring the report threshold requirements into alignment with other Forms 1099. Learn more about the 1099-K threshold change in our blog here.
Finally, all forms have been converted to “Continuous Use” versions for the 2022 reporting season. This means these forms should no longer change in layout, rather the IRS will maintain the electronic formatting year-over-year, but you will need to populate the calendar year in the upper right corner of the form for each year of reporting. For Form 1099-Misc and DIV, a Box Number has been added to the existing FATCA checkbox, causing a renumbering of all subsequent boxes on those forms. Additionally, Forms 1099-SA and 5498-ESA have been converted to fillable online forms for Recipient copies. Crypto transactions will have a new form type for 2022, Form 1099-DA. However, the IRS has yet to release a version of this form (as of November 2022).
Streamline your tax information reporting and withholding
Tax information reporting and withholding requirements are constantly changing. Business cannot assume that just because specific requirements were in place one year, that they will be the same next year. Every year, Sovos reports 620 million tax forms, making us the #1 private filer of 10-series forms filed to the IRS. Companies have relied on our wide breadth of tax information reporting solutions for over 30 years. Sovos’ tax information reporting, withholding management and tax identity management solutions reduce manual work by up to 90%. This empowers our clients to focus on their most important business goals while ensuring compliance.
Download this white paper to learn some of the most common issues organizations face during year-end 1099 reporting, along with best practices to help your business avoid them.