Chief Counsel Applauds IRS Postponement of Three Percent Withholding Tax on Contractors
Release Date: Wednesday, May 11, 2011
Release Number: 11-23 ADV
Contact: Patrick Morris
Email: patrick.morris@sba.gov

 

Washington, D.C. –Chief Counsel for Advocacy Winslow Sargeant applauded the recent decision by Internal Revenue Service (IRS) to postpone the starting date for the three percent contractor withholding rule and continued to call for its elimination. The rule requires governments to withhold three percent of nearly all payments made to contractors. With the postponement, the rule now applies to contracts awarded after December 21st, 2012. The Office of Advocacy has consistently worked with small businesses for the elimination of this unfair tax.

“The decision by the IRS to postpone the three percent withholding tax will help small businesses who are involved in government contracting,” said Sargeant. “And while I applaud the postponement, the Office of Advocacy is committed to supporting its elimination, because small businesses continue to face challenging conditions.”

The three percent withholding requirement will adversely affect all small businesses that provide services to government entities. Most small businesses that provide services to government entities will have to increase their debt level in order to ensure sufficient cash flows and will be forced to pass these additional expenses on to their government customers. If small firms are unable to secure additional debt, the three percent withholding requirement may force them out of the Federal contracting market.

The law mandates that federal state and local governments with expenditures of more than $100 million withhold three percent of payments for products and services worth more than $10,000, including non-confidential or classified contracts, grants to for-profit companies, and farm and Medicare payments. The requirement was scheduled to take effect on January 1, 2011, but was delayed a year in the 2009 American Recovery and Reinvestment Act.
The three percent provision was included in the 2005 Tax Increase Prevention and Reconciliation Act in an effort to ensure that individuals and companies that receive new payments from the federal government do not accrue tax debt.

The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policymakers. Regional advocates and an office in Washington, D.C., support the Chief Counsel’s efforts. For more information, visit http://www.sba.gov/advocacy, or call (202) 205-6533.