IRS Answers Some Questions about Rules for Government Payers to Withhold 3% from Many Payments
There’s a new FAQ page on the IRS website with information that federal, state and local government Accounts Payable, Tax, and Procurement offices will want to know about their future obligation to withhold 3% from a wide range of payments. Section 3402(t) of the Internal Revenue Code (I.R.C.) requires 3% withholding on payments for goods and services to contractors by all branches of the federal government and it agencies, and all units of state and local governments and their instrumentalities, including counties and parishes. This was originally to take effect at the beginning of 2011 but was postponed to the beginning of 2013.
http://www.irs.gov/govt/fslg/article/0,,id=243336,00.html is the IRS 3402(t) withholding FAQ page. Fourteen FAQs are posted now, but if this affects you, keep the link handy because the IRS will be adding more questions and answers over the coming months.
As you study and plan the changes you’ll need to implement for compliance with the withholding requirement, don’t forget that it will cause an increase in the number of Form 1099-MISCs you are going to have to file. Why? Because there’s no corporate exemption from the 3% withholding requirement. You’ll be withholding 3% from payments to corporations, just the same as you will be withholding 3% from payments to other types of vendors. And, even though corporations are still generally exempt from being reported on Form 1099-MISC under the basic 1099 rules (thanks to the repeal of the Section 6041 expansion amendment), once you’ve withheld tax from a payment to a corporation you have acquired an obligation to report the withheld amount in Box 4 of the 1099-MISC. So, prepare to collect more W-9s, do more TIN verification, send out more 1099 statements, and file more 1099s with the IRS.
Bills to repeal Section 3402(t) have been introduced in Congress, but no action has been taken on them.