IRS Rule on Withholding of Taxes from Medicare & Other Government Payments
On December 5, 2008, the Internal Revenue Service (IRS) issued a proposed rule to implement a tax withholding requirement of the Tax Increase Prevention and Reconciliation Act of 2005 that requires federal, state, and local government entities to withhold income tax when making payments to persons providing property or services. The tax withheld will equal 3% of payments made after December 31, 2010. The statute provides an exception for payments made in connection with a public assistance/welfare programs for which eligibility is determined based on needs or income, but not based on age. Therefore, while Medicaid payments are exempt, Medicare payments would be subject to the withholding requirements. The withholding requirement also would not apply to payment amounts below a $10,000 threshold. Multiple payments made to a person generally would not be aggregated for determining if the threshold has been met, but an anti-abuse rule would be established to prevent payment manipulation to avoid required withholding. The IRS will accept comments on the proposed rule until March 5, 2009.
