May 28, 1997
MEMORANDUM No. NCAS-97-0055
TO: Chief Fiscal Officers
FROM: Chuck Cooper
Assistant State Controller
SUBJECT: Backup Withholding on 1099 Vendor Payments
The purpose of this memorandum is to explain a change to our proposal on how to process backup withholding on 1099 vendor payments. Agencies must begin following this new method beginning July 1. Please forward this memorandum to all affected personnel at your agency.
Office of the State Controller (OSC) staff presented the original proposal on April 15 at the McKimmon Center. Under this proposal, OSC sets the NCAS paying entity policy to automatically backup withhold on 1099 vendor payments when the vendors taxpayer ID number is flagged in the NCAS as missing or invalid. The NCAS writes a check to the vendor net of the withheld tax amount. The agency transfers the withheld amount to OSC through the Cash Management System so that OSC can electronically remit the funds to the federal government on the agencys behalf. Many agencies expressed concern about both the difficulties in making error corrections in the NCAS under this method and the difficulties in receiving a refund from the federal government of taxes withheld in error.
On May 8 OSC staff met with a smaller group of agencies to discuss alternatives to the original proposal. As a result of these discussions, OSC has decided to set NCAS paying entity policy to place 1099 vendor payments On Hold when the vendors taxpayer ID number is flagged in NCAS as missing or invalid. An agency must then correct the problem before the NCAS writes a check to the vendor. On Hold payments are listed on the Held Documents Release (HDR) screen in Accounts Payable. The attached document, Procedure 13: Releasing Payments from being Held, explains how to release a vendors payment after the taxpayer ID number is corrected.
Agencies are still required to follow all IRS regulations pertaining to backup withholding and to sending correction notices for invalid taxpayer ID numbers. All handouts from the April 15 meeting at the McKimmon Center continue to be valid under this new method except for procedures 9 and 12.
Procedure 9: Making the Entries to Record Daily Backup Withholding Payments to the IRS and Procedure 12: Completing IRS Forms 945 and 945-A are to be used only when an agency needs to issue a check to a vendor net of the backup withholding amount. Because the backup withholding policy is set at the paying entity level in the NCAS, only OSC staff can change it. To issue a check to a vendor net of the backup withholding amount, contact OSC Client Support for assistance.
If you have any questions regarding IRS regulations on backup withholding, please contact your agencys OSC Systems Accountant. If you need assistance using the HDR screen or accessing any of the backup withholding reports, please contact NCAS Client Support at 875-HELP.
cc: AP Supervisors
Attachments
CHC/tms