1. In Accounts Payable, Records, create an invoice  for the vendor that is subject to the 3% withholding.
  2. Create a new Credit memo  for the 3% of the total invoice amount.  
  3. Edit the 1099 Distribution on the Credit Memo to record withholding to a Box 4 (Federal Income tax withheld.)
  4. Apply the Credit memo to the invoice to reduce the balance of the invoice by 3%.
  5. Produce 1099 Forms.

    For more information on the 3% withholding requirement, refer to the IRS website