Tax

Tax Withholding Law Repealed

Three percent would have been withheld on payments by federal, state, and local governments to companies of all kinds.
David KatzNovember 21, 2011

Employers dodged a bullet Monday when President Obama signed into law a bill repealing a requirement that federal, state, and local governments withhold 3% of the payments they make to vendors, starting in 2013. The bill also includes tax incentives for employers hiring unemployed veterans.

While the withholding provision would have affected industries ranging from schoolbook publishing to construction — any company selling goods or services to federal, state, or local governments — it would have taken a particularly devastating bite out of the cash flows of small- and medium-size businesses, says Robin Schauseil, president of the National Association of Credit Management, which comprises 17,000 mostly smaller businesses as its membership.

For many such companies, the loss of 3% of their cash flow from government purchases would have eliminated their profit margins, according to Schauseil. That might have caused the smaller players to lose business to larger, better funded U.S. companies or foreign ones — or, in some cases, make them think twice about entering bids at all.

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Further, vendors hadn’t received guidance from the government about how they would get the withheld money back or how the withholding system would work. The repeal should provide special relief to CFOs, according to Schauseil. “Now they don’t have to drop everything and plan for this new administrative burden,” she says.

The new law will also reward employers who hire unemployed veterans. Under its Returning Heroes Tax Credit, companies that hire veterans who have been unemployed at least four weeks will be eligible for a tax credit up to $2,400 per employee. Further, companies that hire veterans who are long-term unemployed (looking for work for more than six months) will be eligible for a tax credit of up to $5,600.

The law also provides a Wounded Warriors Tax Credit of up to $9,600 that doubles the existing tax credit for firms that hire long-term unemployed veterans with service-connected disabilities.