4% Withholding on Nonresident Personal Services

If compensation in excess of $1500 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 defines contractor as: 

A nonresident individual who performs, or a nonresident entity that provides for the performance in NC of personal services in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program.

Withholding Requirement: 

Withholding is only required if the contractor is paid more than $1500 during the calendar year.  No tax is required to be withheld if payments, or payments in total, are less that $1500 – with one exception: 

If you expect to pay a contractor more than $1500 during a year, you must withhold 4% from all payments.

Examples of Services Subject to 4% W/H:

1. Speeches at symposiums

2. Concerts

3. Dance Group Performances

4. KeynoteSpeakers
    

If, at the time payments are made, the payer does not believe they will exceed the $1500 level, no withholding is required.  If payments made later in the year cause the total to exceed $1500, the payer is required to withhold 4% from the payment that caused the total to exceed $1500, and any subsequent payments.  However, the payer in 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:

1. Corporations 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 NC

3. Any entity that is exempt from NC 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 (51990, 51991, 51950, 53990…).  Transactions are analyzed to determine if they are personal service payments subject to the 4% withholding, regardless if they are in excess of $1500.  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 $1500 on a year-to-date basis, or there is an expectation that the $1500 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 Don Patty 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 Don 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.