Withholding N.C. Income Tax From Payments Made to Nonresidents
Effective January 1, 1998 , every payer who pays a nonresident contractor more than $1500 during a calendar year must deduct and withhold income tax from compensation at a rate of 4%.DEFINITIONS
Payer means a person who, in the course of their trade or business, pays a nonresident individual or a nonresident entity compensation for personal services performed in N.C.
Compensation means consideration a payer pays a nonresident individual or nonresident entity for personal services performed in this State.
Nonresident Contractor means either:
| (a) | a nonresident individual who performs personal services in N.C. for compensation other than wages, |
| (b) | a nonresident entity that performs for compensation in N.C. services in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film or television program. |
| (a) | a foreign limited liability company that has not obtained a certificate of authority from the Secretary of State; |
| (b) | a foreign limited partnership or a general partnership formed under the laws of any jurisdiction other than N.C., unless the partnership maintains a permanent place of business in this State; or |
| (c) | a foreign corporation that has not obtained a certificate of authority from the Secretary of State. |
WITHHOLDING REQUIREMENTS
- Effective January 1, 1998, nonresident individuals performing personal services and nonresident entities performing services in North Carolina in connection with a performance, an entertainment or athletic event, the creation of a film or television program, or the construction or repair of a building or highway shall have taxes withheld from their payments.
- Effective January 1, 1999, a nonresident entity that performs any personal services in N.C. will be considered a contractor for purposes of tax withholding.
Withholding is required only if the contractor is paid or is expected to be paid more than $1500 during the calendar year. If additional compensation paid to the contractor later causes total compensation to exceed $1500, sufficient tax must be withheld from the additional compensation to make up for the compensation for which no tax was withheld.
WHEN SERVICES ARE PERFORMED IN NORTH CAROLINA
Withholding is required only if the compensation is paid for services performed in this State. Where the service is provided entirely within N.C., tax must be withheld from the total amount of compensation. If the nonresident contractor performs contracted services in more than one state, he must use a method of allocating income that is fair and equitable.
Generally, the duty day method should be used to allocate the compensation to N.C. A duty day is any day or part of a day in which activity connected with the service is performed. This includes meetings, delivery of products, promotional activities, etc. The contractor?s N.C. source income is determined by multiplying the total compensation for the contracted service by a fraction, the numerator of which is the number of duty days spent in N.C. rendering services under the contract and the denominator of which is the total number of duty days spent both within and without N.C. rendering services under the contract.
REPORTING AND PAYING THE WITHHELD TAX
A payer who withholds tax must register with the Department of Revenue by completing Form AS/RPI, Registration Application for Sales and Use Tax and/or Income Tax Withholding, and returning the form to the Business Registration Unit at PO Box 2500, Raleigh, N.C. 27640.
The payer will be assigned an account number, will receive forms for paying the tax withheld (NC-5) from personal services income, and will pay the tax on a quarterly basis.
Payers must report personal services income and the tax withheld, in duplicate, on Form NC-1099PS. For compensation paid to individuals, the payer may complete federal Form 1099-MISC in lieu of Form NC-1099PS. The statement must be given to the contractor on or before January 31 following the year the compensation is paid.
The payer must also file a Form NC-3 reconciling the amounts withheld from each contractor. This reconciliation is due on or before February 28.
SECRETARY OF STATES WEB SITE
The Certificate of Authorization numbers for corporations registered to do business in N.C. can be found on the Secretary of State?s web site: http://www.secstate.state.nc.us/secstate/ then enter the online corporate names database. The database for limited liability companies is not operational yet.