4% Withholding on Nonresident Personal Services

The 1997 session of the General Assembly enacted legislation, General Statute 105-163.3, which requires withholding of North Carolina income tax at the rate of 4 percent on non-wage compensation paid to nonresident individuals and businesses for personal services rendered within N.C. over $1,500 unless certain criteria are met. The withholding tax does not apply to businesses providing repairs. The withholding tax applies to individuals who provide only certain categories of services.

If compensation in excess of $1,500 is paid during a calendar year to a nonresident contractor for personal services in North Carolina, the payer must withhold North Carolina Income Tax at the rate of 4%.

For this tax, the North Carolina Department of Revenue, Directive PD-98-3, defines contractor as:

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

The N.C. 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.

Withholding Requirement:

Withholding is only required if the contractor is paid more than $1,500 during the calendar year.  No tax is required to be withheld if payments, or payments in total, are less that $1,500 – with one exception:

If you expect to pay a contractor more than $1,500 during a year, you must withhold 4% from all payments.

Examples of Services Subject to 4% Withholding:

• Speeches at symposiums
• Concerts
• Dance Group Performances
• Keynote Speakers
• Sports Official
• Continuing education class
• Fireworks

If, at the time payments are made, the payer does not believe they will exceed the $1,500 level, no withholding is required.  If payments made later in the year cause the total to exceed $1,500, the payer is required to withhold 4% from the payment that caused the total to exceed $1,500, and any subsequent payments.  However, the payer is not required to withhold tax from the additional compensation to make up for the tax that was not withheld on earlier payments.

Contractors Exempt from 4% Withholding:

Exemptions 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 N.C. Department of Revenue, or proof that one of the below exemptions are applicable:

1. Corporations (S and C) or Limited Liability Companies that have obtained a certificate of authority from the Secretary of State.
2. A partnership that has a permanent place of business in N.C.
3. Any entity that is exempt from N.C. corporate income tax
4. An individual who is an ordained or licensed member of the clergy
5. Resident of North Carolina

How is the Data Captured?

University accounting runs a query to pull all payments posted to a personal services account (51950, 51970, 51990, 51991, 53929, 53990, 53996).  Transactions are analyzed to determine if they are personal service payments subject to the 4% withholding, regardless if they are in excess of $1,500.  This data is accumulated electronically and updated through the year.  On a quarterly basis the payments that meet the following criteria are accumulated:

1. Payments for services subject to withholding
2. Accumulated payments are in excess of $1,500 on a year-to-date basis, or there is an expectation that the $1,500 threshold will be met during the year.

Tax of 4% is calculated on the payments that meet the above criteria.  These amounts are totaled and paid to the NC Department of Revenue.  The project making the payment for the service is charged for the tax paid.

Example:

1. The University contracts with Bluegrass Legend Milburn Holbrook to do a concert during Homecoming.  He is paid $10,000.  Student Affairs sponsors the concert.  When payment is made, Student Affairs deducts the 4% from the payment and pays the performer $9,600.  At the end of that quarter the 4% Withholding analysis is done and it is determined that the payment meets the criteria requiring 4% withholding.  The tax is paid and Student Affairs is charged the $400, making their total expense $10,000.  At the end of the calendar year, the $10,000 is shown on a 1099-Misc to the performer as non-employee compensation and $400 is shown as NC withholding.
2. Same facts as #1 except Mr. Holbrook is paid the full $10,000.  When the 4% Withholding analysis is done, there is no indication that the tax has already been withheld.  The payment amount is “grossed up” ($10,000 / .96) to determine the amount of tax.  $416.67 is remitted to the NC Dept. of Revenue.  At the end of the calendar year, $10,416.67 is shown on the 1099-Misc as non-employee compensation and $416.67 is shown as NC Withholding.

Frequently Asked Questions

Effective 1/1/2010, the North Carolina Department of Revenue now requires 4% withholding on contractors with Individual Taxpayer Identification Numbers (ITIN).  An ITIN is a number issued by the IRS to process taxes.  The ITIN was created for individuals who do not qualify for a Social Security Number in order for them to pay taxes.  Normally these payments are related to personal service (independent contractors) agreements with the paying entity.  The payment threshold for these payments is the same as for Non Resident Personal Service payments discussed above.

All services performed by ITIN holders in excess of $1,500 cumulatively will be subject to the 4% withholding, not just services in connection with performances, entertainment or athletic events, speeches, or the creation of film, radio, and television programs.  In order to capture these vouchers prior to payment, an approval level was added to vouchers payable to ITIN vendors within Accounts Payable.  This approval comes between college approval and AP approval.  If the determination is made that 4% withholding applies to the voucher, it will be recycled and the department contacted with the reason and information on how much to withhold.