Government Contracts Monitor

Contractor Tax Withholding Provision Delayed

May 17, 2011

The Internal Revenue Service issued a final rule delaying a controversial provision requiring that the Government withhold a percentage of its payments to contractors for tax purposes.  This provision will require federal, state, and local governments with expenditures of more than $100 million to withhold 3% of each payment that is more than $10,000.

  The provision applies to nonconfidential or classified contracts, grants to for-profit companies, and farm and Medicare payments.  Similar to the withholding system for individual salaries and wages, the amount withheld from contractors will be credited towards their taxes owed at the end of the year. 

The withholding requirement was instituted as part of the 2005 Tax Increase Prevention and Reconciliation Act and was scheduled to go into effect January 1, 2012.  However, the IRS delayed the provision making it applicable only to payments made after December 31, 2012 with exceptions for certain unmodified contracts in existence before that date.  After December 31, 2013, the withholding requirement will apply to all contract payments over $10,000 without exception. 

The Obama Administration supports the requirement but agrees that a delay is necessary to allow agencies more time to prepare for the change.  Critics of the provision, however, support repealing it entirely as they believe that there are other measures in place to ensure contractor tax compliance.

Katie Calogero is responsible for the content of this article.