Tax & Accounting Blog

Proposed Jobs Act Includes Provision Delaying Implementation of Law Requiring 3% Withholding

1042-S, 1099, Cost-Basis Reporting, Information Reporting for Wealth Management, International Reporting & Compliance, ONESOURCE, Tax Information Reporting, Trust Tax, W-8 & W-9 Foreign Reporting, Withholding Management September 21, 2011

The President’s Jobs Act Includes a Provision to Delay Implementation of the Law Requiring 3% Withholding by Government Payers for Goods and Services  

The American Jobs Act of 2011 proposed by the President includes a wide range of tax cuts, tax credits, state funding assistance, infrastructure and property rehabilitation projects – and tucked away near the front end of the legislation is a single sentence that would create a one-year delay in the hotly debated tax law that requires government entities to withhold 3% from their payments to suppliers of goods and services.

The withholding requirement was created when Section 3402(t) was added to the tax code as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).  The effective date of withholding under Section 3402(t) has already been pushed back to January 1, 2013.  Payments under existing contracts could remain exempt from withholding until the beginning of 2014, if contracts were not materially modified.

The degree of success to be expected for provisions of the Jobs bill is beyond our ability to predict but, if this little sentence survives in legislation eventually enacted, government payers won’t be applying the 3% withholding provision until payments are made after December 31, 2013.

The IRS has already issued regulations for withholding under Section 3402(t).  Federal, state and local governments, and their agencies and instrumentalities are subject to the requirement to withhold.  There are specific exclusions for various types of payments or payees, and an exception whereby political subdivisions of a state are not required to withhold from payments if their total annual payments (of the type subject to Section 3402(t) withholding) are less than $100 million.

There have been calls to repeal Section 3402(t) and requests for additional exceptions to be added to the regulations.  If Section 3402(t) remains in effect, the IRS is expected to revise Forms 1099-MISC and 945 to accommodate the new tax withholding and reporting.