Are You Prepared for a Three Percent Withholding on All Government Contracts?

But another piece of legislation not getting quite as much airplay, but with much more dire consequences for contractors, is the sweeping requirement mandating federal, state and local governments withhold three percent from payments for all goods and services.

Originally, the Tax Increase Prevention and Reconciliation Act, signed back in May of 2006, was supposed to go into effect this past January. However, the American Recovery and Reinvestment Act delayed its implementation for a year. It is now scheduled to go into effect January 1, 2012.

According to Trey Hodgkins, vice president of technology industry trade association TechAmerica, “The withholding’s flat percentage of revenues from government bears no relationship to companies’ taxable incomes, and will restrict cash flow needed for day-to-day operations and investments. Margins in this industry are already modest; small and medium companies in particular could see theirs obliterated if the withholding is allowed to take effect.”

There is a very serious effort to build a broad coalition of industry and associations to fight this oncoming legislation. One group is the GWRC, The Government Withholding Relief Coalition, which is aggregating much of the latest information regarding the three percent withholding.

While the government is moving towards delaying this requirement, it still appears committed to its eventual implementation. This will have a drastic effect on all government contractors, one that they will not be able to pass on to their customer – the government.

Again, Mr. Hodgkins warns that unless some sort of relief for this withholding comes through, contractors will need to spend valuable resources now to begin tracking and processing the withholding, in order to stay within compliance on their contracts. Setting up systems now to avoid penalties later is crucial to staying in business and continuing to win contract awards.