The Taxpayer First Act (TFA), signed in 2019, mandated that the U.S. Treasury prescribe regulations to decrease the amount of returns the tax agency receives in paper form. In February 2023, the Treasury Department issued its final rules, stating that the threshold for taxpayers required to file taxes and tax forms electronically would be reduced to 10 information returns per year rather than the previous threshold of 250.
What does this mean to you as a business owner?
IRS Tax Forms Included in This New Mandate
Businesses and individuals are required to file certain forms electronically if they file at least 10 per year.
Forms included in these new regulations are as follows:
- W-2
- 1099
- 1095
- 1120
- 1065
- 1094
- 1095-C
- Some 1098 forms
- 1097-BTC
- 1042-S
- 3921
- 3922
- 5498
- 8027
- And others
As part of this new requirement, businesses or individuals must aggregate all the forms they file in one year to determine if they will meet this threshold in 2024. For example, if your company filed 15 such forms in 2023, you will need to start filing those same forms electronically beginning in 2024.
What Happens If I Don’t Follow the New E-Filing Rules?
You face a minimum penalty of $290 per form W-2 that you didn’t file electronically. That’s because the IRS would consider a paper form as a failure to file the form in a timely manner.
The maximum fine you would face is more than $3.5 million in a single year.
Examples of How This New Mandate Might Affect You
Let’s say you are a small business owner who hired four employees in 2024. Each of them would require a W-2 form to submit to the IRS. During your busy time during the summer, you hire five independent contractors to work for three months for your team. You’ll need five 1099 forms. Plus, you account for any tax forms for yourself when you file every year as the owner. That’s 10 forms total in any calendar year. You’ll now be required to file those forms electronically in 2024, regardless of the type of business or organization you run.
Another example is a bit more complicated, but it still means filing tax forms electronically. Your S-Corporation, a small business, is required to file one Form 1120-S (U.S. Income Tax Return for an S Corporation), two Form W–2s (Wage and Tax Statement), two Form 1099–DIVs (Dividends and Distributions), one Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return), and four separate Form 941s (Employer’s Quarterly Federal Tax Return). These equal 10 tax forms total, and you must file them electronically.
How Many Taxpayers Will This New Mandate Affect?
In 2019, the IRS received 40 million paper information returns, which amounts to 1% of the agency’s entire information returns it received that year. If your business needs help transitioning to an e-filing format, whereas previously you filed returns through the mail, the team at The Whitlock Co. can help. Schedule a consultation with us. We can help you with any digital tax processes.
1099-K Reporting Threshold Lowered for 2023
Another significant change for 2023 that will impact your 2024 tax filing is the lower reporting threshold for 1099-K payments from a third-party payment service such as PayPal, Stripe, and Venmo. Before the 2023 calendar year, any transactions from these payment systems would need you to complete 200 transactions yearly and accumulate more than $20,000 in payments from these services.
However, there were ways around this. Let’s say an independent contractor or sole proprietor earned $200,000 a year but received payments from these third-party services once a week, or 52 times. A Form 1099-K from the third-party payment app would not be required in this case.
Starting in 2023, any payments you receive from a third-party payment system totaling more than $600, regardless of the number of payments, will be reported through a Form 1099-K to the IRS.
Independent contractors, who often must file Schedule S forms for self-employment, typically receive a Form 1099-K through these payment platforms. Sole proprietors who run an e-commerce or online business might also be affected by this change if they utilize third-party payment systems.
If you’re a business owner who receives payments from these platforms, consider talking with one of our tax experts. We can help you navigate these changes, particularly when you need a relevant tax strategy throughout the year to give you the best possible tax standing that benefits your business. Request a consultation, and we’ll talk.
