If, in the course of a trade or business, an entity pays compensation of more than $1,500 during the calendar year to a nonresident contractor for personal services performed in North Carolina, that entity must withhold North Carolina tax at the rate of 4% from the compensation.
A contractor is either a nonresident individual or a nonresident entity that provides a performance in North Carolina and receives compensation other than wages. Personal services include services rendered in connection with a performance, an entertainment or athletic event, a speech or the creation of a film, radio or television program.
The NC tax must be withheld from any nonresident and any nonresident entity (C or S Corporation, partnership or limited liability company) receiving any personal services income.
Exemptions
Exemption from the 4% withholding Statute requires providing documentation by the organization of its tax exemption to the payor, such as a copy of the organization’s federal determination letter of tax exemption or a copy of a letter of tax exemption from the NC Department of Revenue.
Tax is not to be withheld from personal services paid to an ordained minister or licensed member of the clergy.
Withholding Threshold
If a contractor will be paid $1,500 or less in a calendar year, no NC tax withholding is required. If the contractor is paid more than $1,500, then the payment that exceeds the $1,500 limit and any subsequent payments in the calendar year must be subjected to the 4% tax withholding. (There is no requirement to request back taxes on previous payments to a contractor in the calendar year that were not subjected to the 4% withholding rate; however, that individual is personally liable for the taxes related to that income.)
Withholding is based on where the personal services were performed, not where the check is being mailed.
Examples
- If a speech was made by a non-NC resident in North Carolina but mailed to an agency in New York, withhold 4% North Carolina taxes.
- If a speech was made by a NC resident in North Carolina but mailed to an agency in New York, do not withhold 4% North Carolina taxes.
If the payor knows the contractor will receive payments in excess of $1,500 in a given year for personal services performed in North Carolina, all payments to the contractor in that year must be subjected to the 4% North Carolina withholding taxes.
If payment is made to an agency in another state for booking fees only, then no 4% withholding requirements exist, unless the booking service was, in fact, provided in North Carolina.