NC Tax Withholding for Non-Residents and ITIN contractors

The law that requires North Carolina income tax to be withheld from payments made to nonresidents for personal services has been amended to also require withholding on payments to ITIN contractors beginning January 1, 2010.  We have seen an increase in audits where the state of North Carolina is looking into required NC income tax withholding for nonresident contractors and ITIN holders.  The details of the law are as follows:

Effective January 1, 2010, North Carolina income tax of 4 percent is required to be withheld from non-wage compensation paid to either:

1) A nonresident contractor or,

2) An ITIN contractor

The requirement to withhold applies to payers who, in the course of a trade or business expect to pay more than $1,500 of non-wage compensation to nonresident or ITIN contractors.  The nonresident contractors include corporations and partnerships with no North Carolina certificate of authority from the Secretary of State.  Please note that this is state tax withholding and not federal income tax withholding.

Exceptions to Withholding

Tax is not required to be withheld from compensation paid to a nonresident entity if the entity meets certain requirements. No tax is required to be withheld if the entity is a corporation or a limited liability company that has obtained a certificate of authority from the Secretary of State. The payer must obtain from the entity and retain in its records the entity’s identification number issued by the Secretary of State.  No tax is required to be withheld from an entity that is exempt from North Carolina corporate income tax under G.S.105-130.11.  This would include any organization that is exempt from federal income tax under the Internal Revenue Code.

 Threshold

Withholding is required if the nonresident or ITIN contractor 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 nonresident or ITIN contractor 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 nonresident or ITIN contractor during the year will exceed $1,500. If additional compensation paid to the nonresident or ITIN contractor 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.

Please contact our office if you have any questions about required North Carolina income tax withholding.

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