Contract Withholding
What should have started on January 1, 2012 was, a federal law that mandated federal, state, and local governments withhold 3% from payments for goods and services. The law was included in section 511 of the Tax Reconciliation Act of 2005. The law was also referred to by the reference numbers Public Law 109-222 and House Resolution 4297. The IRS referred to it as Withholding Under Internal Revenue Code section 3402(t). CGI Advantage refers to that withholding as Contract Withholding. The law stated that vendors were subject to 3% withholding for payments, with exceptions.
Summary of the law is below.
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 required under tab 3402(t), it becomes liable for the payment of the tax.
Sites can be excluded if they make annual payments for property or services of less than $100 million.
Payments under $10,000 are excluded. For Advantage, a payment under $10,000 is interpreted to mean payments where the total of all accounting lines for a given Vendor Line within a disbursement is under $10,000 (net of discounts).
Some types of payment that are exempt from withholding,
payments of interest,
payments for real property,
payments to government entities, tax-exempt organizations, foreign governments, or Indian Tribal governments,
payments made pursuant for a classified or confidential contract,
payments in connection with a public welfare or public assistance plan, and
payments to a government employee with respect to service as an employee.
The existing model for backup withholding still applies. Tab 3406 of Internal Revenue Code has rules for the existing withholding rules, and the law made it clear that section 3406 backup withholding takes precedence over the 3402(t) withholding.
All 3402(t) withholding must be reported by the government entity on Form 1099-MISC, Box 4, at the end of the calendar year. After Advantage was enhanced to handle 3042(t) withholding, the mandate was revoked by the federal government but the feature still exists in Advantage.
