The North Carolina Department of Revenue has released guidance regarding the requirement to file Forms W-2/1099/NC-3 electronically and future withholding tax changes based on recently enacted legislation.

Automatic waiver for requirement to file Forms W-2/1099/NC-3 electronically extended to calendar year 2017

For calendar years 2015-2016, the Department is again automatically waiving the requirement for employers to file calendar year 2017 Forms W-2, 1099, and state NC-3 electronically with the Department. This is an automatic waiver; employers need not file a request with the Department. This does not, however, excuse the employer from filing these forms, on paper or electronically, by January 31, 2018. Failure to file a calendar year 2017 Forms W-2, 1099 and NC-3 information return by January 31, 2018, may result in a penalty against the employer.

Under Session Law 2015-259, the Department is required to assess a $50 penalty against an employer that fails to file an information return with the Department by the date the return is due. The penalty was effective for taxable years beginning on or after January 1, 2016; however, the Department elected to automatically waive the failure to file penalty on calendar year 2016 Forms NC-3 due to be filed by January 31, 2017, but which were filed after that date.

The Department will impose the failure to file penalty on NC-3s due to be filed on January 31, 2018 if the return is not timely filed. (G.S.105-236(a)(10)c.)

Child tax credit converted to a child wage deduction, effective for calendar year 2018

Under Session Law 2017-57, the North Carolina child tax credit is converted to a child deduction. This change takes effect on or after January 1, 2018. Prior to the effective date of this legislation, North Carolina law provides a taxpayer who was allowed a federal child tax credit with a North Carolina child tax credit of up to $125 per child, depending on a taxpayer's filing status and amount of adjusted gross income. However, the child tax credit cannot be used to reduce a taxpayer's liability below zero. Therefore, if the taxpayer does not have a tax liability, then the tax credit does not benefit that person.

Effective for taxable years beginning on or after January 1, 2018, the "Credit for Children" will be repealed and replaced with a new "Child Deduction Amount." New G.S. 105-153.5(a1) expands the number of taxpayers who may benefit by increasing the AGI limits and by providing five deduction amounts, as opposed to the current two credit amounts. The new "Child Deduction Amount" varies based on a taxpayer's filing status and adjusted gross income (AGI) and is equal to the amount listed in the table in the Department's guidance.

Employers are asked to inform employees and pension recipients of the repeal of the child tax credit and enactment of the new child deduction and encourage them to determine if the employee or pension recipient needs to submit a revised withholding exemption form for calendar year 2018. Employers, however, are not required to obtain a new Form NC-4, NC- 4EZ, or NC-4P from each employee or pension recipient because of the conversion of the child tax credit to a child deduction.

Income tax withholding rate to decrease for tax year 2019

Session Law 2017-57 will lower the individual income tax rate from the current 5.499% to 5.25%, effective for taxable years beginning on or after January 1, 2019. North Carolina law (G.S. 105-163.2(b)(1) ) requires that the withholding tax rate be 0.1% higher than the income tax rate in effect. As a result, effective January 1, 2019, the income tax withholding rate will be 5.35%, down from 5.599%.

The legislation also increased the standard deduction for each filing status, effective for taxable years beginning on or after January 1, 2019.

The Department will issue revised income tax withholding tables and formulas (Form NC-30) in late 2018 that reflects the change in the withholding tax rate and standard deductions beginning January 1, 2019.

It is presumed that the supplemental withholding rate will decrease to 5.35%, lower than the current 5.599%.

Employers are not required to obtain new Forms NC-4, NC-4EZ, or Form NC-4P from employees or pension recipients because of the tax rate reduction; however, employers should be aware that an employee or pension recipient may be entitled to an additional allowance because of the reduced tax rate.

For more information on North Carolina income tax withholding, see the Department's website or call +1 877 252 3052.

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