Withholding for Self-Employed Proposed IRS Taxpayer Advocate Nina Olson urged Congress to withhold income taxes on the earnings of self-employed people, including federal contractors. “Unreported income by sole proprietorships is the single largest component” of IRS’s estimate of unpaid taxes, Olson said In her annual report to Congress. “From the standpoint of the tax system, the lack of a withholding mechanism leads to substantial underpayments of tax each year by some taxpayers, while compliant taxpayers pay the full amount of tax due. This disparate treatment undermines the respect of law-abiding taxpayers for the fairness of the tax system.” The idea has been floated many times before — as long ago as 1979 by the General Accounting Office – but has never been enacted by Congress. Olson recommended withholding 5% of payments to most independent contractors and 3.5% on payments to those contractors that maintain inventories or receive payments for materials and supplies. Withholding would apply to payments of $600 or more in a year.