[OSSSA218] Final Regulations on 3% Withholding Released

Karen PARK karen.park at state.or.us
Thu May 19 06:59:30 PDT 2011


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Final Regulations on 3% Withholding Released
 


On May 6, 2011, the Internal Revenue Service released final regulations
(
/app/scripts/exit.jsp?dest=http%3A%2F%2Fwww.gpo.gov%2Ffdsys%2Fpkg%2FFR-2011-05-09%2Fhtml%2F2011-10760.htm
) on section 3402(t) of the Internal Revenue Code (IRC). This provision
provides that, for payments after Dec. 31, 2012, federal, state, and
other units of government with annual payments for goods and services of
$100 million or more must withhold income tax of 3% of the total payment
for goods and services.
IRC 3402(t) was created by the Tax Increase Prevention and
Reconciliation Act of 2005, and originally required withholding for
covered payments after Dec. 31, 2010. The implementation was delayed one
year by a later statute. The final regulations delay it one additional
year, to payments made after Dec. 31, 2012.
Government Entities Required To Withhold Under IRC 3402(t)
The following are subject to the new requirement:
The entire U.S. government, including all federal agencies, the
executive branch, the legislative branch and the judicial branch. 
All states including the District of Columbia (but not including Indian
tribal governments). 
All political subdivisions of a state government or every
instrumentality of such subdivisions unless the instrumentality makes
annual payments for property or services of less than $100 million. 

Exception for Small Entities
Subdivisions of a state, or instrumentalities of a subdivision of a
state, are exempt from the withholding requirement if its total annual
payments for property and services (not including wages) are less than
$100 million. The proposed regulations provide a simple rule for
determining whether an entity makes annual payments less than $100
million. In general the entity looks to its accounting year ending with
or within the second preceding calendar year For example, if total
payments for the entity’s 2011 accounting year exceed $100 million, the
withholding requirement will apply in 2013.
Under an optional rule, an entity may average payments made during any
four of the previous five accounting years ending with the accounting
year ending with or within the second preceding calendar year.
Payments Subject to Section 3402(t) Withholding
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 section
3402(t), it becomes liable for the payment of the tax.
Payment Threshold
The proposed regulations create a payment threshold of $10,000 and
provide that payments below the threshold are not subject to
withholding. The regulations also include an anti-abuse rule that
payments of $10,000 or more may not be divided into payments of less
than $10,000 solely for the purpose of avoiding the withholding
requirements.
Exceptions
The proposed regulations provide the following exceptions from the
withholding requirements: 
Payments otherwise subject to withholding, such as wages.
Payments for retirement benefits, unemployment compensation, or social
security. 
Payments subject to backup withholding, if the required backup
withholding is actually performed. 
Payments for real property, including land or completed buildings. 
Payment of interest. 
Payments to other government entities, foreign governments, tax exempt
organizations, or Indian tribes. 
Payments made under confidential or classified contracts, as described
in IRC 6050M(e)(3). 
Payments made by a political subdivision of a state, or
instrumentalities of a political subdivision of a state that make annual
payments for property of services of less than $100 million. 
Public assistance payments made on the basis of need or income.
However, assistance programs based solely on age, such as Medicare, are
subject to the requirements. 
Payments made under a government grant principally for a public
purpose. 
Payments to employees in connection with service, such as retirement
plan contributions, fringe benefits, and expense reimbursements under an
accountable plan. 
Payments received by nonresident aliens and foreign corporations. 
Payments in emergency or disaster situations. 
Certain payment card transactions reportable under section 6050W. 

More Information
The office of Federal, State and Local Governments (FSLG) will continue
to provide information on these provisions, as it becomes available, on
its website.
 
 



Page Last Reviewed or Updated: May 18, 2011
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Karen Park

Oregon State Social Security Coordinator
Oregon PERS
503 603-7633
karen.park at state.or.us 

SL2
 
Please note my office hours are Monday thru Thursday 6 am to 4:30 pm
 
 

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