Pictured from left: Simeon Alejo, Accounting Manager; Brian Moon, Principal; Congressman Rick Larsen; Bob Galteland, President.
Yesterday, United States Congressman Rick Larsen stopped by the offices of Reid Middleton for a 45-minute discussion on current federal policy and its effect on Reid Middleton. Congressman Larsen represents Washington’s 2nd Congressional District, covering an area from Everett to the Canadian border.
On the 3% Withholding Tax on Contractors
We first discussed a law passed in 2006 that will require larger local, state and federal agencies to withhold 3 percent of all payments to contractors and suppliers as an advanced payment on their federal income taxes starting in 2013. The thought behind the law was to help the federal government collect taxes from contractors who fail pay their taxes properly. Unfortunately, it will negatively impact most of the good contractors who already make quarterly tax payments and properly file a tax return every year. Two significant impacts we foresee are the following:
- The 3 percent criterion is a fixed rate – the amount of taxes withheld cannot be modified or adjusted based on your estimated taxes. If your business is struggling, working at a low profit rate and projecting you will pay little or no federal income taxes, 3 percent of your payments from government agencies will still be withheld.
- The 3 percent applies to all payments made to a company from an agency, but in the case of a prime contractor (as we often are) you cannot easily pass this 3 percent withholding onto subcontractors or suppliers used to accomplish the work. Consequently, tax will be withheld even though the work is essentially pass-through work that is only managed, potentially without any fees earned as a prime.
For Reid Middleton, had the tax been in place in 2010, 154 percent of our federal income taxes would have been withheld through this 3 percent law. Yes, we get the money back through a tax refund when we file our federal income tax – but it is essentially operating capital that is taken out of our bank account and held onto by the federal government until we file the taxes.
There are other issues with the law, including having to track all of the withholdings so they can be claimed on our income tax return. There is also a tremendous burden on many of our clients who will need to track the withholding and send regular payment checks to the IRS.
Congressman Larsen is cosponsor of a bill to repeal the law, so he understands the problems with the legislation. We were pleased to have the opportunity to give him real-life examples of its negative effect on Reid Middleton.
On New Transportation Legislation
Congressman Larsen also requested our thoughts on transportation legislation pending in Congress. The federal government collects a per gallon tax on gasoline and diesel fuels, which is deposited into the federal Highway Trust Fund (HTF) and used to finance major transportation projects around the country. Congress tries to pass multi-year legislation, approving projects to be funded by the HTF. Due to the slowing economy and the increased fuel efficiency of vehicles, the HTF has provided less money than the cost of the projects authorized, and Congress has had to supplement the fund from other resources.
The House of Representatives is contemplating legislation that would provide for 6 years of funding at $220 billion – approximately equal to the revenue available through the Highway Trust Fund. The Senate is considering legislation that would provide for 2 years of funding at $109 billion – approximately equal to the level of highway spending in past years.
The Congressman asked what legislation we would prefer. We felt the fully-funded long-term solution was preferred over the short-term solution that could lead to another debate and a gap in action two years from now. We also discussed alternative methods of funding highway construction. With the advent of electric vehicles and higher fuel efficiencies, the simple gas tax is probably not the solution for long-term funding into the future.
A Call to Action
We very much enjoyed the Congressman’s visit. He was knowledgeable on the subjects discussed and several others we touched on as well. People can tend to avoid politicians and simply complain about things done wrong or not accomplished, but I have found that the majority of our political leaders are genuinely interested in what “regular” people and businesses have to say. If we don’t take the time and effort to provide them our perspective, then they will hear only those who are outspoken on opposing sides of issues, missing what the majority of us have to say that typically lies somewhere in between.
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