Businesses, individuals, and nonprofits may need to file Form 1099 when specific payment thresholds are met, such as payments to independent contractors, rent, or interest.

The Internal Revenue Service (IRS) has introduced a significant update to its electronic filing requirements, effective for the 2023 tax year and onwards (to be filed in 2024). This new mandate stipulates that businesses filing ten or more information returns within a calendar year are obliged to submit these returns electronically. This marks a substantial change from the previous regulation, which set the electronic filing requirement at over 250 annual information returns.

Issued in February 2023, the updated IRS regulations encompass various information return types, including forms such as 1099s and W-2s. Under this new rule, businesses are required to aggregate the total number of all return types to determine if they meet or exceed the ten-return threshold. For instance, a company that needs to file two Form W-2s and eight Form 1099-NECs would have to file all of these returns electronically, as the combined total crosses the ten-return limit.

The mandate is quite inclusive, with few exceptions. It applies to almost all returns if their cumulative number exceeds ten. This regulation significantly impacts how businesses manage and file their information returns, especially those dealing with independent contractors' payments.

If a business fails to e-file information returns like Forms W-2 and 1099-series when required, it may face penalties as outlined in IRC Section 6721. These penalties can be imposed for not filing electronically and for late filing or submitting returns with incorrect information.

In 2023, the potential penalty can reach up to $310 for each return, with a yearly cap of $3,783,000. However, for smaller businesses with annual gross receipts not exceeding $5 million, the maximum penalty is limited to $1,261,000. These penalty amounts are subject to annual adjustments based on indexing.

Additionally, hardship waivers are available for those who would encounter significant difficulties meeting the e-filing requirements.

The updated IRS electronic filing mandate has significant implications for businesses employing independent contractors. While many companies are accustomed to electronically filing W-2 forms, the inclusion of 1099-NEC forms, typically used for freelancers and 1099 workers, into this process is a new requirement. Businesses with many independent contractors must now develop standardized procedures for filing 1099-NEC forms to maintain organized records, including tax verifications and invoices, for smooth filing at year-end.

The change from a 250-return threshold to just ten is considerable, affecting many businesses that previously relied on manual filing methods.

This oversight can lead to compliance risks and unregulated spending. With the new mandate, it becomes crucial for businesses working with independent contractors to maintain a comprehensive overview of all 1099-NEC forms required for end-of-year filing.

To adapt, companies may need to assign specific roles, possibly within human resources, to manage independent contractor engagements. This would ensure consistent onboarding and payment processes across the organization, facilitating accurate reporting at the end of the year.

Additionally, implementing automated and centralized systems could significantly reduce administrative workload and the likelihood of manual errors.

You can get Form 1099 from the IRS website, request it from the IRS, or use tax software like Inkle for assistance.

Yes, you can electronically file through the FIRE system, often extending the deadline to March 31. Many tax software providers and e-filing services offer this option.