North Carolina 4% Withholding for Nonresident Personal Services

Overview

North Carolina law requires organizations to withhold 4% North Carolina income tax from certain payments made to non-resident individuals and businesses for personal services performed in North Carolina.

This requirement applies to payments for qualifying personal services when the total compensation paid to a contractor exceeds $1,500 during a calendar year, unless the contractor qualifies for an exemption.

When is 4% withholding required?

A University department must withhold 4% North Carolina income tax when all of the following conditions are met:

  • The contractor is a nonresident individual or nonresident business
  • The payment is for qualifying personal services performed in North Carolina
  • Total payments to the contractor exceed $1,500 during the calendar year, unless withholding is required from the first payment because the total compensation is expected to exceed the threshold

If you expect total payments to a contractor to exceed $1,500 during the year, 4% must be withheld from all payments, including the first payment.

If the total payments unexpectedly exceed $1,500 later in the year, withholding begins with the payment that causes the threshold to be exceeded and continues on all future payments. The University is not required to recover withholding that should have been taken from earlier payments.

What services are subject to withholding?

Examples of services that generally require 4% withholding include:

  • Guest speakers and keynote speakers
  • Symposium presentations
  • Concert performances
  • Dance performances
  • Entertainment events
  • Film, radio, or television productions

The North Carolina Department of Revenue defines a contractor as:

A nonresident individual who performs personal services in North Carolina for compensation other than wages in connection with a performance, entertainment or athletic event, speech, or the creation of a film, radio, or television program.

Who is exempt?

The following contractors may be exempt from the 4% withholding requirement:

  • North Carolina residents
  • Corporations (S Corporations and C Corporations) or Limited Liability Companies that have obtained a Certificate of Authority from the North Carolina Secretary of State
  • Partnerships with a permanent place of business in North Carolina
  • Organizations exempt from North Carolina corporate income tax
  • Ordained or licensed members of the clergy

Contractors claiming an exemption should provide appropriate documentation, such as:

  • A federal tax-exempt determination letter
  • A North Carolina Department of Revenue tax exemption letter
  • Documentation demonstrating that one of the statutory exemptions applies

Servics not subject to withholding

The 4% withholding requirement does not apply to businesses providing repair services.

Legal Authority

The withholding requirement is established under North Carolina General Statute 105-163.3 and interpreted by the North Carolina Department of Revenue Directive PD-98-3.