Tax Bill Contains Tax Withholding On Payments To Contractors

Inserted into the massive tax bill passed in May, the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297) signed by President Bush, is a new requirement mandating a 3% tax withholding on payments to contractors for goods and services provided to federal, state, and local governments. This new requirement could be potentially devastating to small federal contractors.

The provision does the following: requires tax withholdings at a rate of 3% on payments for products and services made by the federal government, as well as State and local governments with contracting expenditures of $100 million or more; imposes burdensome information reporting requirements on payments that are subject to the withholding; does not apply to payments for government employee wages, interest, real property, tax-exempt entities, foreign governments, classified contracts, and intra-governmental payments. The provision applies to payments starting in 2011.

The impetus for this provision came from five recommendations issued in Treasury’s Bluebook that was released with the President’s budget in February addressing the Tax Gap. The Treasury estimates this new requirement will result in raising $225 million in the next four years for the U.S. Treasury. WIPP is getting involved with a coalition headed up by the U.S. Chamber of Commerce to address this provision. WIPP will continue to keep you informed of this issue.