Largely fueled by necessity during the COVID-19 pandemic, Federal and state governments throughout the U.S. have updated their tax withholding and information reporting processes. With funds given via the Coronavirus Aid, Relief, and Economic Security (CARES) Act, states can now create modernized state tax systems. This includes new or updated online systems and processes for paying withholding taxes and filing withholding returns, 1099 returns and more.
What do these updated systems mean for state reporting requirements and how will businesses with obligations be affected? Let’s review why the changes are happening, what other changes can be expected and what businesses can do to keep pace with it all.
Why the need for updated systems?
Increases in businesses not reporting and/or reporting inaccurate information have put states in a complicated position. When businesses file inaccurate reporting information with state governments or do not file at all, state tax deficits grow and can quickly cause an array of problems for states. Additionally, states are requiring tax reporting information to be submitted faster. With filing methods other than electronic (i.e., paper or magnetic media submissions), there is often a long delay before states get the information they need. Additionally, more states are offering later due dates for businesses that file electronically versus paper or magnetic media submission.
As reporting thresholds are lowered for many series 1099 forms, filing is getting more complicated for many businesses. Updating these systems benefits the IRS and states in ensuring reporting is more accurate. It also brings greater consistency to businesses that are filing.
The following states have started implementing new tax systems:
- Maine launched the Maine Tax Portal (MTP) and began converting business payments and return processes in late 2022. The state is planning to convert bulk filing of 1099 information to MTP in late 2023.
- Oregon rolled out the new FRANCES system in the fall of 2022. This included changes to withholding tax payments and withholding return filing processes. The state will convert 1099 and W-2 information return filing to the new system in 2023.
- Pennsylvania launched MyPATH in late 2022 and required information return filing of 1099s and W-2s in the new system by the end of January.
Going forward, more states will likely implement new tax filing and payment systems that impact businesses and governments alike.
What changes are expected?
More modernized systems for tax reporting are only part of the process. As states continue to implement new systems, the following changes are likely to happen:
- Accelerated deadlines: New technology means states will be able to process information returns faster than before, allowing them to move up deadlines.
- Increases in reporting: Sates will likely continue lowering thresholds, both in terms of dollar amount and filing volume. New technology means states are able to process more information than ever before, and they will want the most accurate information they can receive.
- Increase in audits and penalties: States’ exposure and data oversight will be heightened greatly with their new systems, meaning more audits and costly penalties to those who file misinformation.
Additionally, states are likely to cease paper filings as a type of acceptable filing format. Many states have recently removed the option of filing via paper or magnetic media submission, and more are expected to follow suit.
The following states have recently released new/updated filing thresholds:
- Arizona changed its electronic filing threshold for 1099s and W-2s for tax year 2022. For 2022 reporting and beyond, all federal form attachments (W-2/1099 Series) supported by the state must be filed electronically.
- Colorado’s electronic filing threshold for 1099s and Form W-2 was lowered from 100 to 10 forms for tax year 2021 and beyond.
- Maryland moved away from accepting Magnetic Media submissions for information returns. The state’s electronic filing threshold for 1099s was also lowered to 25.
- North Dakota no longer accepts Magnetic Media submissions for information returns. The state also requires electronic filing for all federal forms for tax year 2022 reporting.
- Ohio moved to lower electronic filing thresholds for Forms 1099-R and W-2 for 2022 reporting.
- Kentucky, Rhode Island and the District of Columbia all eliminated paper options for submitting withholding reconciliations forms, effective for 2023 reportings.
More states will likely release guidelines on individual electronic filing thresholds for upcoming reporting throughout 2023.
Technological updates can quickly become problematic for businesses, especially those that are unfamiliar with electronic filing processes. Increased difficulties in interpreting and navigating these new portals and their unique filing requirements are expected, especially as states can customize individual filing portals. Businesses must have a process in place to test all logins before the 2023 reporting season.
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