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May 29, 2006: Tax Bill Calls for Withholding on Government Contractors

May 29, 2006
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WASHINGTON - A negative element of the new tax-cut bill is beginning to get a lot of attention, reports the Small Business & Entrepreneurship Council (SBE Council). When President Bush signed the legislation, the government took "the unprecedented step'" according to GovExec.com, "of withholding taxes from payments made to federal, state, and local contractors." Under the provision, governments at all levels would be mandated to withhold 3 percent from payments for a range of goods and services. The withholding does not kick in until 2011, and opponents of the bill - government contractors, state and local governments, and allies - vow to repeal the measure.

According to GovExec.com, Sen. Larry Craig (R-Idaho) stated he would revisit the provision even though he voted for the tax bill.

From the small business perspective, forcing firms, individuals, and governments to track and comply with the withholding mandate on an individual payment basis would be a costly and burdensome exercise. As the SBE Council sees it, starting with government contractors only opens the door to putting all independent contractors under the withholding regime. In fact, the Treasury and IRS continue to push increased withholding, and are reviewing and studying the independent contractor classification rules in order to crack down on what they view as widespread abuse of the system.

But this would be bad for U.S. competitiveness and the economy, asserts Karen Kerrigan, SBE Council president and CEO, in a Legal Opinion Letter for the Washington Legal Foundation. In the piece, "Independent Contractors: Preserving the Model is an Economic Imperative," Kerrigan argues that independent contractors play a key role in nurturing economic growth; the model is an effectual path for financial success through business startup and growth; and independent contractors are central to our nation's competitiveness.

"They embody the U.S. economic system's flexibility, which allows our business and entrepreneurial sector to be the most dynamic, productive, and innovative in the world," writes Kerrigan.

Kerrigan argues that rather than come down hard on all independent contractors because of the abuse of a few, laws should be simplified and modernized to maintain and improve upon a system that has made the U.S. the economic force that it is today.

"It may be the instinct of government to impose more rules on business and individuals when laws are being broken or tested, but in the case of independent contractors, a more thoughtful approach that includes a balance of enforcement, education, and reform is what's required to maintain the flexibility and entrepreneurship that makes the U.S. economy the best in the world," concludes Kerrigan.

With respect to the new withholding mandate on government contractors, the SBE Council said it will be working with allies in the public and private sector, as well as in Congress, to repeal the provision.

Publication date: 05/29/2006

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