Mandatory 3% Tax Withholding on Government Contractor Payments Postponed to 2013
Final regulations issued on May 5, 2011 by the Internal Revenue Service delayed the implementation of mandatory 3% withholding on payments for providing property or services from government entities to contractors until January 1, 2013. With the final regulations, a $10,000 exemption threshold for single payment was adopted as were payments received under written binding contracts in effect on December 31, 2012. However, contracts originally in effect but materially modified after December 31, 2012 will not be exempt and subject to the 3% withholding requirement. A proposal was made by the IRS and Treasury Department at the same time final regulations were issued for payments received after January 1, 2014 on existing contracts in effect December 31, 2012 to be subject to the mandatory withholding. The final regulations also adopted the proposed anti-abuse rule that if payments are divided into multiple payments to avoid the $10,000 payment threshold, that payments are treated as a single payment made on the date of the first payment.
Other guidance in the final regulation included:
- Payment to a contractor by the government entity is subject to the withholding, not the contractor’s payments to subcontractors.
- The date of which payment is made is the date subject to withholding without regard to the date of acceptance of the service or property.
- Payments excluded for interest or real property includes purchase or lease of existing real property but does not extend to construction of buildings, roads or bridges or other public works projects.
EGP, PLLC is an accounting firm specializing in construction, manufacturing and distribution, banking, and litigation support and valuations. The firm performs audits and reviews, prepares company and individual tax returns, assists management with monthly financial statements, and analyzes and implements tax saving strategies. Members of the firm also provide financial planning services.
Pursuant to IRS Circular 230, this letter is not intended and cannot be used to avoid IRS penalties or promote, market, or recommend to another party any transaction or matter addressed herein.
