Why Does the Government Want to Withhold 3 Percent on Its Own Payments?

While the American Institute of Certified Public Accountants isn't exactly asking that question, they are doing a little, er, encouraging on this matter:

Congress should repeal a 3 percent tax withholding rule facing government contractors and individuals such as farmers and medical professionals, Patricia Thompson, chair of the Tax Executive Committee of the American Institute of Certified Public Accountants, said in Congressional testimony today. The provision would subject the contractors to 3 percent withholding on payments they receive for goods and services provided to federal, state and local governments.

“The AICPA strongly urges Congress to repeal the 3 percent withholding on payments made to government contractors, and for Medicare, farm and certain other payments,” Thompson said in testimony submitted to the House Small Business Subcommittee on Contracting and Workforce for the hearing record. The subcommittee’s hearing examined the need to repeal the provision.

Thompson said AICPA members are reporting that state and local governments are concerned about the cost to reprogram their systems to comply with the law and that their clients are concerned about the law’s potential impact on cash flow.

Thompson noted that Congress delayed the effective date of the provision in 2009 from Jan. 1, 2011 to Jan. 1, 2012. The Internal Revenue Service issued final regulations on May 9 that included a further one-year delay in the effective date until Jan. 1, 2013. The 3 percent withholding provision was approved by Congress as part of the Tax Prevention and Reconciliation Act of 2005.

“Without compelling evidence of non-compliance by these persons and business entities in terms of non-payment of their federal tax liabilities, the additional burden may not be necessary,” Thompson said. The IRS already has a number of tools it uses to thwart nonpayment of federal taxes by government contractors and granting of contracts to businesses that have unpaid federal taxes.

Look at it this way... Let's say you get a job and your employer says your pay rate will be $100,000 a year (for easy math purposes, of course). Let's say also that your employer requires you to pay into a donut fund (in this example, the donut fund is the same as your federal income tax) - and because your employer is paranoid that you won't be honest and pay into the donut fund like you are asked to, they withhold 3% of your pay just in case. So you're really getting paid $97,000 a year. Why not just say $97,000 and call it a day?

If the government can't trust its own contractors (most of whom are audited several times over), who can it trust? Don't answer that, it was totally rhetorical.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.