When it comes to 1099-NEC reporting, most accounting and AP professionals focus on meeting the IRS deadline. But what’s often overlooked is that many states require their own 1099-NEC filings, separate from the IRS.
Direct state reporting is a required but often overlooked part of payment information reporting by teams big and small. Meeting IRS deadlines is critical for all businesses to ensure compliance and avoid costly penalties and audits from the IRS, but the truth is businesses often fail to report payments necessary to stay compliant during tax season.
A Hidden Challenge: State 1099-NEC Reporting
Since the IRS reintroduced Form 1099-NEC in 2020, state reporting has become more complicated than ever. Some states participate in the Combined Federal/State Filing (CFSF) Program, which allows the IRS to share form data directly with state tax agencies, ensuring payments are properly handled. However, many do not, and some have special conditions for reporting.
Here’s the problem:
- Some states require direct filing, even if you’ve already submitted to the IRS
- Others only require reporting if state withholding applies or if the recipient resides in the state. This is especially true if payments fall under non-employee compensation.
- A few states don’t require filing at all because they don’t impose income tax
This makes complying with direct state reporting requirements a headache for businesses of all sizes. Direct state reporting requirements don’t always come from where your business is incorporated; they also stem from where your recipients reside. So, even if you don’t think you have direct state reporting obligations, your business likely does.
The Workload Multiplies for AP and Compliance Teams
At the federal level, filing 1099-NECs through IRS systems is relatively straightforward, although it requires careful preparation of Form 1099 NEC to report payments accurately. But when you factor in direct state reporting to 30+ states with requirements, the workload can grow exponentially. Below are a few examples of how filing may differ state-to-state, reflecting differing information returns:
- File formats: Each state may require its own data layout or XML schema. The purpose of adhering to correct formats is to facilitate accurate data filing.
- Filing methods: Some states accept electronic uploads, others use unique web portals, and a few still require paper filing. This is why filing with CFSF aids in complying with these varied formats.
- Deadlines: State filing dates can vary from late January through March, requiring businesses to effectively coordinate their reporting.
- Penalties: Like the IRS, each state’s tax authority can impose penalties for inaccurate information reporting, with some states imposing penalties of hundreds of dollars per form
For AP and tax reporting teams already stretched thin during year-end, managing all these moving parts manually can easily consume days, if not weeks or even months of effort.
Best Practices for Simplifying 1099-NEC Direct State Reporting
Understanding your obligations is the best and easiest way to avoid penalties when it comes to direct state reporting Form 1099-NEC (and other forms).
Below are some best-practice tips we recommend for businesses, especially when dealing with 1099 NEC IRS compliance. Below are some best-practice tips we recommend for businesses:
- Know where reporting is required: Direct state reporting gets complex because instead of working with the IRS where you have one deadline, one threshold per 1099 form, and one system to report to, you are potentially dealing with 30+ different states with different rules and regulations. Knowing which states you have obligations in (remember, this can be where you OR your recipients are located, OR where service was performed) is the easiest way to start getting into compliance.
- Watch for updates: Like the IRS, states can often change thresholds, due dates, and filing requirements each year, even after January 1st in some cases. Ensure you have a way of tracking updates and implementing them into your reporting process. This includes ensuring your team is versed in the latest developments of the CFSF program as states participate CFSF with new protocols.
- Implement software: Using a 1099 software simplifies 1099 reporting and ensures compliance by implementing the latest regulations and thresholds, automatically. 1099Pro Cloud is designed with always-on compliance, created for professionals who want to ensure compliance and automate 1099 filing from validating TINs, printing & mailing forms to recipients, to reporting with the IRS and states.
How 1099Pro Cloud Helps:
With 1099Pro Cloud, you can manage your entire 1099 process for both federal and state in one secure, integrated system, allowing you greater control over your tax reporting process.
Here’s how it helps:
- Automatic 1099-NEC & W-2 State Reporting: 1099Pro Cloud automatically determines which states require direct reporting and submits on your behalf, using the correct file format and method for both nonemployee compensation and employee payments. Plus, 1099Pro Cloud includes support for states that participate in the Combined Federal State Filing Program (CS/SF).
- Built-In TIN Matching: Validate recipient information upfront with a Bulk TIN match upon data entry and built-in real-time TIN for new recipients and re-checks.
- Streamlined corrections: Quickly identify and fix data errors before submission with intuitive workflows.
- Comprehensive tracking: Monitor real-time filing status for both federal and state submissions from a single dashboard.
- Multi-Entity management: File on behalf of multiple businesses or clients with ease – With no limit on number of payers or users in the system.
- Secure compliance: Maintain complete audit-ready records and meet every state’s technical specification without having to track them manually.
Preparing Now for Next Tax Season:
If your team spent this past filing season juggling spreadsheets, portals, and state websites, now’s the time to simplify.
Take these steps before year-end to get ahead:
- Review where your vendors and contractors are located to identify potential state filing obligations.
- Verify payee information and run a Bulk TIN Match early.
- Centralize your reporting process with a solution that automates both federal and state filings.
With 1099Pro Cloud, you can stop worrying about which states require direct filing and focus on accuracy, compliance, and efficiency.
Ready to simplify state reporting compliance? Try 1099Pro Cloud free for 7 days
Frequently Asked Questions:
What are the specific state requirements for filing 1099-NEC forms? Each state can have specific requirements. Similar to the IRS these can be different thresholds, due dates, reporting formats, and more.
What is the Combined Federal State Filing Program? The Combined Federal State Filing Program (also known as CFSF or CF/SF) is a federal program in which the IRS will forward information return information to states that participate in the program, in some cases eliminating the need for direct state reporting.
If I file CFSF do I need to file directly with states? Possibly. Each state has different requirements when reporting. For those that participate in the Combined Federal State Filing Program, they may also require direct reporting under certain circumstances like if withholding applied or if the recipient doesn’t live in the state.
What does Form 1099-NEC report? Form 1099-NEC reports Non-Employee Compensation to the IRS. This form is used to report earning of contractors, vendors, or other non-employees.
How do I state file Form 1099-NEC? Depending on what states you have obligations in, this process can look different. You will likely need to create an account with the states’s income tax return system and file directly with them. Using a software like 1099Pro Cloud streamlines this process by filing Form 1099-NEC directly with states on your behalf.