Starting on January 1, 2012, all Federal, state, and local government entities will be required to withhold tax at a rate of three percent from payments for property or service, deposit these withholdings with the IRS, and report them to the IRS and the payees. The requirement was originally set to go into effect in 2011 but was delayed for a year.
Generally, withholding is required on all payments to all persons providing property or services to the government, including individuals, trusts, estates, partnerships, associations, and corporations.
Withholding is required at the time of payment, and applies to payment in any form (cash, check, credit card or payment card). If the government entity fails to withhold the tax, it becomes liable for the payment of the tax.
The regulations create a payment threshold of $10,000 and provide that payments below the threshold are not subject to withholding.
The regulations also include an anti-abuse rule that payments of $10,000 or more may not be divided into payments of less than $10,000 solely for the purpose of avoiding the withholding requirements.
Exceptions from the Three Percent Withholding Requirement
The regulations provide the following exceptions from the withholding requirements:
- Payments otherwise subject to withholding, such as wages.
- Payments for retirement benefits, unemployment compensation, or social security.
- Payments subject to backup withholding, if the required backup withholding is actually performed.
- Payments for real property.
- Payments of interest.
- Payments to other government entities, foreign governments, tax exempt organizations, or Indian tribes.
- Payments made under confidential or classified contracts, as described in IRC 6050M(e)(3).
- Public assistance payments made on the basis of need or income. However, assistance programs based solely on age, such as Medicare, are subject to the requirements.
- Payments to employees in connection with service, such as retirement plan contributions, fringe benefits, and expense reimbursements under an accountable plan.
- Payments received by nonresident aliens and foreign corporations.
- Payments made by Indian tribal governments.
- Payments in emergency or disaster situations.
Exception for Small Entities
Subdivisions of a state, or instrumentalities of a subdivision of a state are exempt from the withholding requirement if its total annual payments for property and services (not including wages) are less than $100 million.
How To Report Withheld Tax
Withholding is required at the time of payment. Payments subject to the withholding requirement must be shown on Form 945, Annual Return of Withheld Income Tax.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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