The IRS will not be enforcing the 3% withholding on payments from government entities to contractors until December 31, 2013. The effective date of December 31, 2012 was postponed by the American Recovery & Reinvestment Act of 2009 (PL 111-5) in order to allow for payments made after December 31, 2012.
In addition to extending the effective date, the withholding requirement does not apply to payments made after December 31, 2012 if the payments are made under a written binding contract in effect on December 31, 2012. However, if there are changes to an existing contract made after December 31, 2012, these payments may be subject to withholding. Exceptions to payments made after December 31, 2012 will expire on January 1, 2014.
Other stipulations to the ruling include:
- The $10,000 payment threshold applies to each payment to a person, regardless of the number of items of property or services a payment covers. In this case, withholding can not be avoided by making multiple payments.
- When a government entity pays a contractor, the payment to the contractor is subject to withholding, not the contractor’s payments to subcontractors.
- The date of a payment subject to withholding is the date the payment is made.
- Utility service payments are not exempt.
- Tax-exempt payees are excluded.
- The exception for real property includes purchases or leasing of an existing real property, rather than new construction.
- The exception for government employee compensation includes employer-provided fringe benefits.
- Typically, grants made by government entities for particular public purposes are excluded.
- The payment subject to withholding includes any sales, excise or value-added tax.