|
Latest News > New Income-Tax Withholding Mandate Signed Into Law
New Income-Tax Withholding Mandate Signed Into Law
June 2006
The threat of income-tax withholding on payments for goods and services purchased from vendors—such as independent contractors (ICs)—has become a reality. Provisions contained in the Tax Increase Prevention and Reconciliation Act of 2005, H.R. 4297, which President George W. Bush signed into law on May 17, 2006, will require a tax withholding of 3% from all payments made for goods and services by federal, state, and local government agencies. The new withholding mandate will become effective with expect to payments made after December 31, 2010.
This means that if a company does business with a government agency, the government’s payments to that company for the goods and services it provides will be reduced by 3%. The 3% will be withheld and treated as estimated payments against the company’s tax liability for the year.
The withholding provisions were not contained in the versions of the bill that were passed by either the Senate or the House of Representatives. They were added by the Conference Committee that merged the Senate- and House-passed bills into a final bill, which was then passed by both chambers.
The 3% withholding mandate contains numerous important exemptions. Withholding will not be required with respect to
- Amounts already subject to withholding by another provision of the Internal Revenue Code (Code), except Code § 3406;
- Amounts subject to withholding under Code § 3406 and from which amounts actually are being withheld under such section;
- Interest payments;
- Payments for real property;
- Payments to any governmental entity that is, itself, required to withhold from the payments that it makes;
- Payments to a tax-exempt entity;
- Payments to a foreign government;
- Payments made pursuant to a classified or confidential contract described in Code § 6050M(e)(3);
- Payments made by a political subdivision of a state or instrumentality thereof that makes less than $1 million of such payments annually;
- Payments in connection with a public assistance or public welfare program for which eligibility is determined by a needs or income test; or
- Payments to any government employee not otherwise excludable with respect to the services as an employee.
To understand how the new withholding mandate will apply, consider a company that is awarded a government contract that will commence January 1, 2011. Assume that the government owes the company fees for the month of January 2011 in the amount of $10,000. The government would pay only $9,700, The remaining $300 would be withheld and applied against the company’s estimated taxes for 2011. This would be the result regardless of whether the company operates with employees or ICs.
|
