Your Guide to 1099 Direct State Reporting

Earlier due dates, stricter deadlines drive change in tax preparation and reporting.

As tax authorities become more vigilant in their practices and enforcement of regulations, ensuring you have all the information to remain compliant is becoming critical. This guide will help businesses: 

Better understand the tax gap and how it impacts regulatory oversight

Know which payments are subject to annual filing requirements

Learn practices and procedures for properly filing annual returns

Understand the impact of technology on tax filings

Comprehend the costs of inaccurate reporting

What is state tax reporting?

Reporting 1099 and other returns to state governments is complex. It is largely made up of unique interrelated parts and the requirements change every year. One of the most complicated aspects for businesses of all sizes is determining what tax information to report, where to report, how to report and when it needs to be reported

All U.S. businesses are required to make federal and state tax payments to the governments, as well as file informational returns. Outside of payroll, businesses are also required to withhold taxes on payments and report details related to payments of:

  • Rents
  • Royalties 
  • Services performed by nonemployees 
  • Gambling winnings 
  • Interest and dividend income
  • Retirement distributions
  • All types of payments to nonresidents 

Annually, these details must be reported to the federal and state governments (and payees) on over 30 different information returns including Forms 1099, 1042-S and more.    

Table of contents

Direct State Reporting Guide

Direct state reporting for 1099s is a complex space, with changes happening annually for individual states and form types. New reporting requirements, Combined Federal State Filing Program (CF/SF) participation changes, form thresholds, and filing methods are just a few examples that each business must keep in mind when direct reporting their 1099s.

Read more about direct state reporting.

How can you avoid inaccurate direct state reporting?

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. 

Read more about avoiding inaccurate direct state reporting. 

What is the IRS Combined Federal State Filing (CF/SF) Program?

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.

Read more about the CF/SF program. 

How updated technology impacts state tax information reporting

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? 

Read more about technology and state tax information reporting.

How Sovos can help you get started and stay on the path to state compliance

Avoiding state reporting errors and maintaining compliance – even as your business grows and regulations change – is a critical part of achieving your strategic objectives as a business.

Learn more about Sovos state reporting solutions.  

Frequently Asked Questions

The CF/SF program supports 11 types of forms, but states require businesses to file 26 different types. For example, a bank that is obligated to file Form 1099-C Cancellation of Debt for a California resident with the IRS is also required to file that form with the state. But the 1099-C is not supported in the CF/SF program. Some states that indicate they participate in the CF/SF program, like Massachusetts, still require businesses to report all nonpayroll tax information directly to the state.

Due to delays in receiving CF/SF information from the IRS, many states require returns to be filed earlier than the IRS. For example, Form 1099-MISC Miscellaneous Information is due to be filed electronically with the IRS by March 31 annually, but the District of Columbia requires DSR of all 1099s reporting $600 or more by January 31. 

Many states require reporting of 1099 income at higher or lower thresholds than the IRS. For example, Arkansas requires Form 1099-INT Interest Income to be filed when amounts reported are at least $100 or more but the IRS requires the form to be reported following a $10 threshold. 

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. Other states are still requiring returns to be submitted via paper or magnetic media. However, many states are modernizing their systems to inevitably move away from these methods.

Many states have penalties for avoidance or noncompliance noted on their website or portals. But if a state does not explicitly detail how it penalizes on its website, it does not mean that the state couldn’t penalize or warrant an audit. As state budgets shrink and deficits grow, states will turn to enforcement initiatives to re-coop taxes, wherever possible. 

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