Tax & Accounting Blog

New IRS Regulations Authorize a Broader Scope of Voluntary Federal Income Tax Withholding

1099, Blog, Global Tax Compliance, ONESOURCE, Tax Information Reporting, Trust Tax December 10, 2013

US CAPITOL BUILDING LOOKING AT WEST STEPS FROM HELICOPTER.New temporary and proposed federal tax regulations authorize an expansion of voluntary withholding of federal income tax, including withholding on payments for non-wage services. The temporary regulations (TD 9646) went into effect immediately, and the proposed regulations (REG-146620-13) are open for public comment through February 24, 2014. They authorize voluntary withholding to be expanded to “appropriate” types of non-wage payments simply through the publication of guidance in the weekly Internal Revenue Bulletin. The IRB is the vehicle for publication of IRS Notices and Revenue Procedures. No guidance under these regulations has been published yet.

Voluntary income tax withholding on payments to independent contractors has been recommended by the National Taxpayer Advocate and in legislative proposals by Presidents Obama and George W. Bush. The new regulations state that expanding the use of voluntary withholding agreements will permit taxpayers to use the withholding regime (rather than the estimated tax payment process) to meet their tax payment obligations on a timely basis, minimize the risk of underpayment of taxes, and achieve administrative simplification for taxpayers and the IRS.

Under these new regulations, the Treasury and IRS would publish guidance to describe types of “other payments” subject to voluntary withholding agreements. They would develop and publish guidance on additional details including how long a voluntary withholding agreement could remain in effect, and what sort of form would be used for the agreement.

Payment systems currently in use do not provide a uniform method of withholding on non-wage payments. Accounts Payable operations currently are required to withhold on payments to independent contractors only when 28% “backup withholding” is required due to a payee’s failure to furnish a taxpayer identification number, or due to notification by the IRS that the taxpayer identification number for a payee is incorrect.