North Carolina Withholding from Nonresident Contractors and ITIN Holder

As a new year begins, we want to remind those doing business in North Carolina of a commonly overlooked withholding requirement.

General Requirements:

Businesses are required to withhold North Carolina state income tax at a rate of 4% on payments to any of the following –

1.  A nonresident contractor, meaning a nonresident individual or entity who performs for compensation any performance, entertainment, athletic event, speech, or creation of a radio, film, or television program. A nonresident entity can be an out-of-state LLC, partnership, or corporation, which has not received a certificate of authority from the N.C. Secretary of State.
2. An ITIN contractor, meaning an individual who does not have a social security number who performs services in NC other than wages for compensation. An ITIN is issued by the IRS to a person who is required to have one and is not eligible to obtain a social security number. The ITIN is a nine-digit number that begins with the number 9. The requirement applies to any service provided by an ITIN contractor.
3.  A person who does not provide a taxpayer identification number.
4. A person who does not provide a valid taxpayer identification number.

Details:

1. The tax rate to be withheld is 4%.
2. The tax withholding requirement applies to businesses who expect to pay more than $1,500 of annual non-wage compensation to any one payee. It applies to all compensation paid when the total annual compensation is expected to exceed $1,500 (not when it actually does exceed $1,500). When a payment is made that takes the total payments for the year over $1,500, the withholding requirement is in effect. See examples below.
3. Payers should remit the tax to NC based on their existing N.C. withholding requirements.
4. Payers should report the NC withholding on Form NC-1099M.

Example:

The payer pays an ITIN contractor $900 in January 2022, and does not expect to make any further payments to the ITIN contractor in 2022. Because the compensation is expected to be $1,500 or less, no withholding is required.

Later in 2022, the same ITIN contractor is paid an additional $800. The payer must withhold $32 from the $800 compensation ($800 x 4%) because the total compensation paid to the ITIN contractor for the year now exceeds $1,500.

In contrast, if the payer makes regular payments to the ITIN contractor during the year, the total of which is expected to exceed $1,500, tax must be withheld from each payment.

Exemptions:

Withholding is not required from the following payees:

• Corporations or Limited Liability Companies that have obtained a certificate of authority from the Secretary of State.
• A partnership that has a permanent place of business in North Carolina.
• Any entity that is exempt from North Carolina corporate income tax under G.S. 105‐130.11. The entity must provide verification of this tax exemption to the payer, 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 Department of Revenue.
• An individual who is an ordained or licensed member of the clergy.
• Resident of North Carolina.

If you have any questions or would like additional information, please contact DMJPS.