Construction Law Toolbox
CONTRACTORS SHOULD PREPARE FOR 3% WITHHOLDING FROM GOVERNMENT CONTRACTS
As part of the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA"), Congress required federal, state and local governments to withhold 3% on payments made to government contractors and some others from payments made for property or services. Implementation of the law was set to take effect January 1, 2011, but was delayed until January 1, 2012. The IRS just released its final regulations related to the law. The good news for contractors is that the IRS has delayed implementation until January 1, 2013.
The delays in implementation have resulted at least in part from the passage of the American Recovery and Reinvestment Act. However, unless the law is repealed, the deferment will come to an end and contractors should begin preparing now for its eventual implementation since your cash flow will be impacted. The law is a flat withholding on the gross amount irrespective of any other conditions such as whether the contractor owes any back-taxes or whether the contractor even expects to have taxable income.