Eye on Washington: Electronic Tax Filing Mandates
Eye on Washington is ADP's business legislative update designed to provide timely information on legislation that impacts employers from a payroll, tax and compliance perspective.
Employers Face a Wave of Electronic Tax Reporting Mandates in 2011
Updated: November 10, 2010
The IRS recently announced that virtually all businesses* must use the IRS Electronic Federal Tax Payment System (EFTPS) for all federal tax payments after 2010.
Businesses that handle tax administration themselves or through a tax advisor should be vigilant for all changes in electronic tax payment rules to avoid inadvertent mistakes and costly penalties. Such mandates typically include penalties of 5% to 10% of the tax amount paid if remittance is by check.
Almost every state already requires some employers to pay withholding taxes electronically. Recent trends indicate that states are rapidly broadening such mandates to include more (or all) employers.
- Formerly, Georgia businesses that remitted payments of $5,000 or more had to pay electronically. House Bill 334 (2009) lowered the threshold for sales or withholding to payments of $1,000 in 2010, and $500 in 2011, affecting employers with as few as five workers. The penalty for payment by check is the greater of $25 per return or 5% of the tax due.
- Beginning January 2011, Illinois will reduce its electronic tax payment mandate to $12,000 annually, affecting businesses with as few as eight employees.
- Connecticut enacted legislation in June requiring electronic payments of withholding of more than $2,000 per year. This would include almost every employer in the state.
- Nebraska LB 879, effective June 2010, mandates electronic payments from businesses owing over $20,000 annually. A penalty of $100 applies to payments by check.
- Massachusetts started requiring all new businesses to pay withholding taxes electronically almost ten years ago. For unemployment insurance, there’s no alternative to electronic payment. All employers have to file quarterly wage reports and pay electronically.
- Similar to the federal EFTPS change, New Jersey has discontinued the use of paper returns for reporting and remitting income tax withheld and unemployment insurance. Beginning in 2009, all businesses must file returns and submit the related payments electronically.
- Kansas enacted SB 430 in June, which requires all employers to pay sales and withholding taxes electronically. This new law took effect July 1, 2010, but the Kansas Department of Revenue has permitted paper forms, as needed, through September 2010.
For details or to check your state's electronic payment and filing requirements, visit the Federation of Tax Administrators' website (www.taxadmin.org/fta/edi/eftlinks.html).
Don’t Forget Child Support
Employers also have to contend with electronic payment mandates for other payroll withholding, such as child support orders. At least eleven states fall into this category: California, Florida, Illinois, Indiana, Massachusetts, Nebraska, Ohio, Oregon, Pennsylvania, Texas and Virginia.
State rules requiring employers to pay electronically vary widely. A few examples:
- California employers – all are required to pay any taxes electronically
- Florida employers – 10 employees or more
- Indiana employers – 50 employees or more
- Massachusetts and Oregon employers – 5 employees or more
- Pennsylvania employers – 15 employees or more
As with employer withholding tax obligations, employers that don’t keep up with all law changes and continue to pay by check will be subject to substantial penalties. In Indiana, employers can be fined $25 per incident; in Pennsylvania it can be $1,000 per failure. Each state maintains their own electronic child support withholding payment sites with diverse rules, systems and due dates. Other states, such as Wisconsin, require other types of employee withholding (i.e., tax garnishments) to be paid electronically.
Separate Electronic Filing Rules Apply for Payroll Tax Returns, W-2s and Wage Reports
The information above relates only to electronic payment mandates for payroll taxes and withholding. Entirely different rules, thresholds, and agency systems (i.e., websites and file upload protocols) apply to employer return filing obligations, such as quarterly payroll tax returns, annual W-2s and quarterly wage reports.
Some states set e-file mandates as low as 25 W-2s (CT, RI). For state workforce agency filings (i.e., unemployment insurance taxes and wage reporting), several states recently adopted rules requiring businesses with even one employee to file electronically [e.g., MA (1); MN (1); NJ (1); FL (10); KY (10)].
How to Prepare
Given the expanding new exposure to penalties, employers who are converting to new electronic filing or payment systems should review all related procedures and backup systems. For example, be sure to register far enough in advance, and consider potential problems, such as lost passwords, early input cutoff times, unexpected absence of responsible individuals, power outages, software problems or Internet interruptions, inclement weather and coordination with tax advisors.
Also, if you register to have the state electronically debit your bank account, you may need to coordinate with your bank. Business owners are increasingly setting up debit screens to prevent fraudulent withdrawals. If that’s the case, you may need to get the state’s bank account number and let your bank know that electronic debit requests from the state should not be blocked.
In addition to new government penalties, diverse e-file requirements often mean that new accounting and filing software will be needed. Make sure you understand the new federal rules and any new mandates in the states in which you operate. All things considered, this might be a good time to consider outsourcing to a reputable payroll service provider, such as ADP. ADP is the largest single remitter of taxes to the IRS and most states, and has been at the forefront of electronic tax administration for many years for enhanced accuracy and efficiency.
One thing is clear: The trend toward increasing electronic filing and payment mandates is expected to accelerate over the next few years.
IRS Proposed Regulations Expand the Use of Electronic Payment System
Federation of Tax Administrators (FTA) links to all State Tax/Revenue Agency Websites
*Employers with quarterly tax liabilities under $2,500 can continue to pay via check with their quarterly return.
Last updated on November 10, 2010. This content is provided solely as a courtesy and should not be construed as tax or legal advice. ADP is committed to obtaining the most current information on Federal and State legislative reform to help ensure that our Benefits, HR and Payroll outsourcing solutions remain compliant with the changing laws while you focus on your business. This content is subject to change and is provided solely as a courtesy and should not be construed as tax or legal advice. We will continue to provide updates on this page as the situation continues to evolve. Your tax or legal counsel should be consulted for updates on law and guidance that may have an impact on your organization and the specific facts related to your business.