The IRS created the Combined Federal State Filing (CF/SF) program more than 20 years ago to help alleviate the administrative burdens on small businesses reporting 1099 information to states. This program integrates federal and state filings. The IRS uses information filed in federal filings and then forwards relevant information to states on a business’ behalf. However, not all states participate in the CF/SF program and not all 1099s are included in the program.
It’s important to remember that CF/SF filing is not a catch-all for direct state reporting (DSR). Even when a form is filed through the CF/SF program for a participating state, the state could still require that same form to be filed directly to them. Monitoring which states you have direct state reporting obligations in, and for which form types are crucial to ensure accurate reporting and not face costly state penalties.
When a state requires direct reporting, it can specify how it wants to receive information in three different ways. First, there are states that do not participate in the CF/SF program and require all information to be reported to them directly. This option is more complex for the filer, but it does get information to states quicker.
However, if a state participates in the CF/SF program, it can either satisfy its requirements with CF/SF filings or require reporting in addition to/instead of those CF/SF filings. Remember, some states that participate in the CF/SF program are satisfied with the program’s reporting for some 1099s but require direct reporting for others.
If you file Form 1099 with the IRS, then chances are your business likely has DSR obligations. As of tax year 2022, 43 states require DSR of at least one type of Form 1099.
Which states participate in the CF/SF program?
The following states participate in the CF/SF program: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Wisconsin.
All businesses that file 1099 information electronically with the IRS can include additional state tax information in the file of information returns and the IRS will share it with participating states (for free). However, there are drawbacks to the CF/SF program, such as it not supporting all form types required by the states. For example, 34 states require businesses to report Form W-2G Certain Gambling Winnings but the form is not included in the CF/SF program.
Another program gap is in the timing of receiving 1099 information compared to when taxpayers file annual returns. The IRS does not share the original return information with the states until mid- to late-April (or later), which is typically long after income tax refunds have been issued to taxpayers.
As a result, some states don’t participate at all in the CF/SF and require DSR with the tax agency. Others require DSR for all 1099 information, even though the IRS indicates that the states participate in the CF/SF program. For example, in Hawaii state reporting requirements for Form 1099-MISC are satisfied by CF/SF filing but in Connecticut, Form 1099-MISC still must be reported directly to the state if the payments were:
- To residents of Connecticut
- To non-resident individuals for services performed wholly or partly in Connecticut
- State withholding.
Things to remember about direct state reporting
The CF/SF program does not satisfy all 1099 requirements. For example, only 11 forms were included in the program for tax year 2022:
- 1099-B, 1099-DIV, 1099-G, 1099-INT, 1099-K, 1099-MISC, 1099-NEC, 1099-OID, 1099-PATR, 1099-R, and Form 5498
Due to delays in receiving CF/SF, many states require returns to be filed at earlier due dates than required by the IRS. For example, Form 1099-MISC Miscellaneous Information is due to be filed electronically with the IRS by March 31, annually, but Washington D.C. requires DSR of all 1099s reporting $600 or more by January 31.
Methods for reporting information returns also vary. Some states have adopted the IRS formats for filing returns (i.e., Publication 1220 format). Other states require unique formats, such as comma delimited formatted files. Finally, most states still require paper returns to be submitted for corrected copies of 1099s.
Constantly keeping track of each state’s reporting requirements can be tricky and time-consuming for your employees. State reporting obligations add to the complexity of determining what tax information must be reported, when, where and how to report it. With each state able to dictate the forms they require, the various due dates, filing methods and thresholds, the intricacies only increase. However, working with the right partner can help in the process.
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