IRS Mandated to Automate Tax Filing in 1 Year; Employers Face $250 Paper Filing Fee or $2,000 Credit

The “Electronic Filing Improvement and Logistical Efficiency Act of 2025” is a major push to drag employment tax filing into the digital age. Simply put, this bill mandates that the Internal Revenue Service (IRS) create a fully automated electronic filing and payment system for all employment taxes within one year of enactment (SEC. 3). The goal is to make paper filing obsolete, and the bill uses both a carrot and a stick—a tax credit for early adopters and a significant fee for holdouts—to get employers to switch.

The Carrot: A $2,000 Digital Bonus

To incentivize the switch, the bill establishes a tax credit for employers who file their quarterly employment tax returns and payments electronically (SEC. 4). This isn’t a small benefit: an employer can claim a $1,000 credit in the first quarter they file electronically, and then another $1,000 credit in an elected quarter the following year, provided they remain digital. For a small business, that $2,000 is real money that can offset their Social Security and Medicare taxes. However, the bill includes a tricky catch: a recapture rule. If you claim the credit but then revert to paper filing later, you have to pay the credit back, and you lose eligibility for any future credits. It’s essentially a commitment to the digital system.

The Stick: The $250 Paper Penalty

If the credit is the carrot, the $250 user fee for paper filing is a pretty hefty stick (SEC. 5). For tax periods ending two years after the law takes effect, any employer who files their quarterly or annual employment tax return on paper instead of electronically will be hit with a $250 fee. Think of the local mechanic shop or the small, established trade business that still relies on physical forms—this fee will be a mandatory quarterly expense if they don't switch. This provision is clearly designed to make paper filing financially painful for everyone except those who genuinely cannot file electronically.

Who Gets a Pass?

Recognizing that not everyone has fiber optic internet, the bill does offer crucial exceptions to the $250 paper fee and the credit recapture rule. The Secretary of the Treasury must waive the fee for employers in rural areas or those without ready access to broadband or convenient online services, or during emergency situations where electronic filing causes undue hardship (SEC. 5). They also get a one-time pass for their first two paper submissions, coupled with a notice explaining the new electronic requirement. This is important: it means employers in remote areas or those facing technical difficulties won't be penalized just for their location or lack of infrastructure. Interestingly, federal, state, and local governments are explicitly excluded from claiming the electronic filing tax credit, even though they manage massive payrolls.

What This Means for Your Payroll

If you run a business, this bill means you need to start planning your digital transition now. The IRS has a one-year deadline to build the new system, and once it's live, the incentives and penalties kick in quickly. For third-party payroll providers, the bill gives them a slight break: they won't face the recapture rule or the $250 fee for a specific return as long as they file at least 99% of their total returns electronically. This protects the big payroll services from being penalized for a few clients who insist on paper. For everyone else, the message is clear: the government is done with paper employment taxes, and you have two years before that $250 penalty arrives.