House Votes to Repeal 3% Withholding Tax Mandate

Tax could adversely affect an advisor that, for instance, helps run the local government’s 401(k) plan

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The full House on Oct. 27 passed a bipartisan bill, H.R.674, to repeal a 3% withholding tax mandate that would adversely affect advisors and their clients that do business with local, state or federal government entities.

The 3% withholding tax mandate, which was enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005, affects anyone doing business with federal, state or local government and “withholds 3% of pay until the end of the year, assuming some won’t pay their taxes,” says Chris Paulitz, spokesman for the Financial Services Institute in Washington.

Paulitz says Democrats are planning to offer a similar repeal bill for consideration in the Senate.

For a broker-dealer or advisor, the 3% withholding tax could directly affect an advisor that, for instance, “helps run the local government’s 401(k) plan,” Paulitz explains. For clients, if they are “cutting lawns for government buildings, they lose that 3% of their pay throughout the year—money they could [give to] an advisor to invest for them, or to create more jobs in their business.”

Dale Brown, FSI's CEOFSI President and CEO Dale Brown (left) added in a statement applauding the House’s repeal of the measure that “businesses that provide services to the government deserve to be paid in full and due upon receipt. They shouldn’t be forced to lose a percentage of their pay they could be investing throughout the year or using to hire additional employees.”

The withholding tax, Brown went on to say, “could create cash flow problems as well as draining capital that could be used for job creation and business expansion.”

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