Withholding Three Percent from Payments to Contractors

Beginning January 1, 2013, Internal Revenue Code Section 3402(t) will require federal, state, and local government entities with total budgets of at least $100 million to withhold three percent from every payment to contractors for goods and services. As currently enacted, this impacts payments for all goods and services under government contracts, as well as payments to any person for a service or product provided to a government entity, even Medicare and certain grants.

Earlier this year the American Institute of Certified Public Accountants (AICPA) called on Congress in congressional testimony and letters to repeal the withholding provision, calling it an undue burden for both governments and contractors and unnecessary, given existing tools that already monitor contractors’ federal tax compliance. We urge interested parties to contact their representative and express their views about this rule. The AICPA is actively monitoring the proposed legislation to repeal the three percent withholding rule for government contracting in Congress. At this time there is no plan for a vote in Congress on this issue. Also, there is no specific guidance published or any forms.

Since governments and businesses involved in government contracting need to be prepared to begin capturing the appropriate information so they can do the proper withholding and make the appropriate payments, the IRS is sponsoring two internet-based information sessions. The content for the two sessions is identical, and they are being held on August 4 and August 18, 2011 at 2 p.m. ET. The sessions will provide a brief update on the enactment of the required three percent withholding on payments by certain government entities beginning in 2013. These sessions also will be open for questions and will focus on which governments are required to withhold under these rules, which payments are subject to the withholding, and procedures for reporting and paying the withheld amounts.