If your small business has employees working in North Carolina, you’ll need to withhold and pay North Carolina income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on North Carolina state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like North Carolina) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a North Carolina withholding tax account with the North Carolina Department of Revenue (DOR). You set up your account by registering your business with the DOR using Form NC-BR, Business Registration Application for Income Tax Withholding, Sales and Use Tax, and Machinery and Equipment Tax. You can submit Form NC-BR online or by regular mail. If you register online you’ll receive your withholding tax number instantly. If you register by mail, you should receive your number within 10 days. There is no fee to register your business with the DOR.
All new employees for your business must complete a federal Form W-4 and also should complete the related North Carolina Form NC-4, Employee's Withholding Allowance Certificate. If an employee does not provide a Form NC-4, you are required to withhold based on the employee being single with zero allowances. You can download blank Form NC-4s from the withholding tax forms section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
In North Carolina, there are three possible payment schedules for withholding taxes: semiweekly, monthly, or quarterly. Your payment schedule ultimately will depend on the average amount you withhhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
Due dates for payments are:
If the payment is due on a weekend or holiday, the due date is extended to the next business day.
The DOR will send you a booklet of coupons—also sometimes called withholding returns—to use when making payments. Depending on your payment schedule you will use Form NC-5 (quarterly and monthly payments) or Form NC-5P (semiweekly payments). You can also make payments online through the DOR’s Electronic Services website.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check DOR Publication NC-30, Income Tax Withholding Tables and Instructions for Employers.
Apart from making scheduled tax payments, businesses making payments on a semiweekly schedule also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. If you need to file this return, use Form NC-5Q, Quarterly Income Tax Withholding Return. This return must be filed by mail.
Quarterly returns are due on or before the last day of the month following the close of the quarter. Due dates for Form NC-5Q are the same as for your federal quarterly return IRS Form 941. In other words:
As with tax payments, any return due date that falls on a weekend or state recognized holiday is adjusted to the next business day.
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal form W-2 summarizing the employee’s withholding for the year. Use Form NC-3, Annual Withholding Reconciliation. You should attach copies of the federal W-2s sent to all of your employees working in North Carolina. The annual reconciliation must be filed by mail and is due on or before the last day of February.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of North Carolina employee withholding taxes. Under North Carolina law, employers can be held personally liable for failing to withhold or pay withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.