In a recent directive, effective January 1, 2020, the North Carolina Department of Revenue will require income tax withholding of 4% from payments made to nonresident contractors and certain nonemployee compensation payments where a taxpayer identification (TIN) or individual taxpayer identification number (ITIN) is not available.

The directive reflects changes that were enacted to North Carolina law as part of Session Law 2019-169 (Senate Bill 523).

Covered payees

The North Carolina income tax withholding requirement applies to these payees:

• A nonresident contractor
• An ITIN contractor (the withholding requirement applies not only to a person whose taxpayer identification number is an ITIN, but also to a person who has applied for an ITIN number and a person whose ITIN number has expired)
• A person who performs services in North Carolina and fails to provide the payer with a TIN
• A person who performs services in North Carolina for compensation and provides an invalid TIN to the payer (if the Department notifies a payer that a payee's TIN is not valid, the withholding requirement applies to any compensation paid to that payee on or after that date)

Withholding threshold

The North Carolina income tax withholding requirement applies when the payee is expected to be paid more than $1,500 during the calendar year. Tax is not required to be withheld from a payment of compensation to a payee if the payment is $1,500 or less and, at the time the payment is made, the payer does not believe that the total compensation to be paid to the payee during the year will exceed $1,500. If additional compensation paid to the payee later in the year causes total compensation for the year to exceed $1,500, the payer is not required to withhold tax from the additional compensation to make up for the compensation from which no tax was withheld.

Exceptions to the withholding requirement

The requirement to withholding North Carolina income tax from nonemployee compensation does not apply to:

• A corporation or limited liability company that has obtained a certificate of authority from the Secretary of State
• An entity that is exempt from North Carolina corporate income tax under G.S.105-130.11, including any organization that is exempt from federal income tax under the Internal Revenue Code
• A partnership that has a permanent place of business in North Carolina
• Compensation paid to an individual who is an ordained or licensed member of the clergy.
• Compensation paid to an ITIN holder who is temporarily admitted to the US to perform agricultural labor or services under an H-2A visa and who is not subject to federal income tax withholding under IRC Section 1441

Annual reporting

• At the end of each calendar year a payer who withholds North Carolina income tax from a payee's compensation must prepare and give each payee the required form or statement (e.g., Form 1099-MISC) that reports the total compensation paid to the payee and the North Carolina income taxes withheld during the calendar year.
• A payer must annually file Form NC-3, Annual Withholding Reconciliation, and the North Carolina copy of any required forms or statements (e.g., Form 1099-MISC).

For more information on required forms or statements to payees and Form NC-3, see Form NC-30, Income Tax Withholding Tables and Instructions for Employers, as well as other important information on withholding tax available on the Department's website.

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