Withholding On Payments To Government ContractorsEffective January 1, 2013, many federal, state, and local governments wil...
The amount to withhold, and the application of the $10,000 payment threshold, aredetermined on a payment-by-payment basis ...
Upcoming SlideShare
Loading in...5
×

Withholding On Payments To Government Contractors

462

Published on

Effective January 1, 2013, many federal, state, and local governments will be required to withhold 3% from nearly all contract payments made to government contractors and other persons providing them with property or services. The withholding requirement was first added as part of the Tax Increase Prevention and Reconciliation Act of 2005, in response to a perceived tax compliance problem with government contractors. With its impending effective date looming, the withholding requirement has been criticized by industry groups who fear it will result in costly compliance burdens both on businesses and governments.

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
462
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "Withholding On Payments To Government Contractors"

  1. 1. Withholding On Payments To Government ContractorsEffective January 1, 2013, many federal, state, and local governments will be requiredto withhold 3% from nearly all contract payments made to government contractors andother persons providing them with property or services. The withholding requirementwas first added as part of the Tax Increase Prevention and Reconciliation Act of 2005,in response to a perceived tax compliance problem with government contractors. Withits impending effective date looming, the withholding requirement has been criticized byindustry groups who fear it will result in costly compliance burdens both on businessesand governments.In general, the withholding requirement provides that once effective, the federalgovernment and the government of every state, political subdivision of a state, andinstrumentality of a state or state subdivision (including multi-state agencies) makingcertain payments to a person providing any property or services (e.g., payments from apolitical subdivision to a government contractor) will have to deduct and withhold taxfrom that payment in an amount equal to 3% of the payment. Payments subject towithholding under this rule will also be subject to information reporting requirements.Despite the rule’s broad application, there are several notable exceptions. For example,withholding is not required for payments that are less than a $10,000 threshold,measured on a payment-by-payment basis. In addition, withholding is not required forany payments that are made by a political subdivision of a state (or any stateinstrumentality) that makes less than $100,000,000 of such payments annually. Othertypes of payments that are not subject to withholding (and that also should not becounted toward the $100,000,000 threshold) include the following payments:• Payments made to government employees, such as wages, fringe benefits, or employee benefit plans;• Payments subject to other types of withholding or backup withholding;• Payments for real property;• Payments to federal, state or local government entities, tax-exempt organizations, or foreign governments;• Payments under certain classified or confidential contracts;• Payments in connection with a public assistance or welfare program;• Payments received by nonresident alien individuals and foreign corporations in certain cases;• Payments of grants;• Payments of loan guarantees;• Payments for interest and principal on a loan; and• Payments for investment securities
  2. 2. The amount to withhold, and the application of the $10,000 payment threshold, aredetermined on a payment-by-payment basis and are based on the actual amount paidto a contractor. However, if payments are divided for the primary purpose of avoidingwithholding, they will be treated as one payment for purposes of applying the $10,000payment threshold. In addition, any amount of retainage (i.e., a hold-back of part of thepayment as security to ensure contract completion) is excluded until the retainage isactually paid to the contractor.Withholding is also required on payments to pass-through entities (such as partnershipsand S corporations). Although no direction on the application of these payments hasyet been issued, the IRS has stated it is currently working on guidance that will addresshow the owners of a pass-through entity such as a partnership or S corporation willclaim the credit for their allocation of any amount withheld from a payment to the pass-through entity.IRS CIRCULAR 230 NOTICE: Any U.S. tax advice contained in this communication (orin any attachment) is not intended or written to be used, and cannot be used, for thepurpose of (i) avoiding federal tax penalties or (ii) promoting, marketing orrecommending to another party any transaction or matter addressed hereinVisit McMillan Consulting for more business and tax information.

×