Effectively managing many contractors requires staying updated on tax and labor laws to avoid penalties. Understanding the differences between contractors and employees, their tax requirements and compliance is crucial to prevent unexpected costs. With tax season comes additional administrative burden, shifting focus from strategic areas. Let’s explore two new IRS and DOL rulings that may impact workforce operations in 2024, and how businesses can best prepare.
The IRS E-Filing Mandate
Starting in 2024, businesses filing 10 or more returns annually will be required by the IRS and Treasury to file electronically as part of new tax-filing regulations. This move aims to enhance efficiency and address the backlog of paper and electronic returns from previous years. Further information about this final regulation can be found on the IRS website.
The DOL Final Ruling
The US Department of Labor has also released a final rule on independent contractor classification, which replaces the ruling of the previous administration. The new regulation employs a six-factor “economic reality” test to determine whether a worker is an independent contractor.
Although the law will take effect on March 11, 2024, it is already facing legal challenges. This rule is designed to safeguard workers and ensure they receive necessary wage and hour protections, thereby preventing the misclassification of employees as independent contractors.
What the DOL Independent Contractor Ruling Means
According to the DOL, “Independent contractors in business for themselves play an important role in our economy — and this rule won’t change that. What it will do is ensure employees receive wage and hour protections.”
Legal experts including Worksuite’s Global Engage Compliance Team concur that this new rule is unlikely to have a significant impact on businesses that already have a compliance process and employ best practices for classifying their workforce.
As always, businesses should continue to regularly audit their worker classification processes, contracts, and stay abreast of local labor laws. When unsure, seeking advice from a workforce compliance specialist is always beneficial.
What the 1099 E-Filing Mandate Means
Previously, only organizations filing over 250 information returns per year were mandated to e-file, calculated for each individual return type. Businesses with, for instance, 150 W-2 forms and 200 1099 forms were exempt from electronic filing. However, the new requirement’s threshold is far lower. The new e-filing mandate requires businesses filing 10 or more returns annually with the IRS to now file electronically, or face penalties.
Businesses should note that only contractors paid $600 or more in the tax year require a 1099-NEC; below that payment threshold, 1099 filing is not required.
All businesses must adhere to this new process if they annually file at least 10 of the listed tax forms, including but not limited to:
- Information returns for reporting payments (such as W-2 forms and 1099 forms)
- Corporate income tax returns (including nonprofits and corporations with total assets under $10 million at the end of the taxable year)
- Partnership returns (including organizations with over 100 partners)
- Unrelated business income tax returns
- Registration statements
- Withholding tax returns for U.S. Source Income of Foreign Person
- Disclosure statements
- Actuarial reports
- Notifications
- Certain excise tax returns, among others
How to File 1099s Online
The IRS has introduced IRIS, an online portal to aid businesses in transitioning to new tax e-filing procedures. This platform enables secure creation, upload, editing, and viewing of 1099-series forms. It supports businesses of all sizes, accommodating manual entry or template uploads. Exceptions include employment tax returns. Waivers may be granted for businesses struggling to comply with the new rules.
Risks and Penalties of Not E-Filing in 2024
To ensure compliance with new requirements, your team must thoroughly review all freelancer payments and returns. Failure to e-file can lead to IRS rejection and penalties. Accurate form filing is crucial. As of 2024, incorrect filing penalties can range up to $310 per form for businesses with gross receipts under $5 million. Larger businesses face higher penalties. Note that penalty amounts may change annually.
Need help compliantly managing and paying your contingent workforce? Consult with a workforce compliance specialist from Worksuite today.