Obama Signs Law That Repeals
3 Percent Withholding, Provides Tax
Incentives for Hiring Veterans
On November 21 President Obama signed
legislation repealing a controversial law
that would have required federal, state, and
local government entities with total annual
expenditures of $100 million or more to withhold
3 percent of certain payments for goods and
services to government contractors and vendors.
The new law also contains an amendment—the
VOW to Hire Heroes Act—that expands and
extends tax credits for companies that hire
unemployed or disabled veterans and provides
other veterans’ benefits.
Originally established by the Tax Increase
Prevention and Reconciliation Act of 2005, the 3
percent withholding requirement was scheduled
to take effect in 2013 after two postponements. It
was intended to help close the “tax gap” created
by government contractors and vendors that fail
to pay all the taxes they owe.
However, the provision ignited a firestorm of
complaints that it would unfairly penalize tax-compliant companies by hurting their cash flow.
Also, some federal agencies estimated the cost to
implement the requirement would outweigh any
potential improvements in tax compliance.
Based on these arguments, lawmakers voted in
overwhelming numbers to repeal the provision.
This should be welcome news to businesses that
provide products and services to government
entities, such as construction contractors,
manufacturers of vehicles and military
equipment, and even health care providers.
Employer Tax Credits
The Work Opportunity Tax Credit (WOTC)
provides employers with a tax credit equal to 40
percent of a portion of qualified first-year wages
paid to new hires from certain disadvantaged
groups, including qualified veterans. The Hire
Heroes Act expands the credits available to
companies that hire unemployed or disabled
veterans and extends those credits through the
end of 2012. (The WOTC is scheduled to expire at
the end of 2011 for other targeted groups.)
The basic credit applies to wages up to $6,000
paid to veterans whose families receive food
stamps, for a maximum credit to employers of
$2,400 per hire. In addition, before the Hire
Heroes Act, a credit of up to $4,800 was available
for disabled veterans who were hired within one
year after discharge from active duty or had been
unemployed for six months or more during the
year before the hire date.