NCDOR Requires 4% Withholdings on ITIN Contractors
Contractors beware, especially those in the construction industry! North Carolina statues GS 105‐163.1 and GS 105‐163.3 requires income tax to be withheld at the rate of 4% from payments of more than $1,500 paid during a calendar year to nonresident individuals or nonresident entities for personal services performed in North Carolina in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program. Additionally, NC requires income tax to be withheld at the rate of 4% from payments of more than $1,500 paid during a calendar year to ITIN contractors for services provided within the state. It is this latter statement that is the subject to this article.
The law that requires North Carolina income tax to be withheld from payments made to nonresidents for personal services has been amended to also require withholding on payments to ITIN contractors beginning January 1, 2010. We have seen an increase in audits where the State of North Carolina is looking into required North Carolina income tax withholding for nonresident contractors and ITIN holders. The details of the law are as follows:
Effective January 1, 2010, North Carolina income tax of 4 percent is required to be withheld from non-wage compensation paid to either:
1) A nonresident contractor or,
2) An ITIN contractor
The requirement to withhold applies to payers who, in the course of a trade or business, expect to pay more than $1,500 of non-wage compensation to nonresident or ITIN contractors. The nonresident contractors include corporations and partnerships with no North Carolina certificate of authority from the Secretary of State. Please note that this is state tax withholding and not federal income tax withholding.
Exceptions to Withholding:
Tax is not required to be withheld from compensation paid to a nonresident entity if the entity meets certain requirements. No tax is required to be withheld if the entity is a corporation or a limited liability company that has obtained a certificate of authority from the Secretary of State. The payer must obtain from the entity, and retain in its records, the entity’s identification number issued by the Secretary of State. No tax is required to be withheld from an entity that is exempt from North Carolina corporate income tax under G.S.105-130.11. This would include any organization that is exempt from federal income tax under the Internal Revenue Code.
Withholding is required if the nonresident or ITIN contractor is expected to be paid more than $1,500 during the calendar year. Tax is not required to be withheld from a payment of compensation to a nonresident or ITIN contractor if the payment is $1,500 or less and, at the time the payment is made, the payer does not believe that the total compensation to be paid to the nonresident or ITIN contractor during the year will exceed $1,500. If additional compensation paid to the nonresident or ITIN contractor later in the year causes total compensation for the year to exceed $1,500, the payer is not required to withhold tax from the additional compensation to make up for the compensation from which no tax was withheld.
Our office has recently seen where the North Carolina Department of Revenue (NCDOR) is aggressively auditing North Carolina construction companies on the issue of whether they are properly withholding with respect to payments they make to their Individual Taxpayer Identification Number (ITIN) contractors. We continue to see the NCDOR targeting North Carolina construction companies on this issue, so you need to continue to be aware of the issues involved, including how you and your human resources team should handle ITIN contractors. Starting in 2016, the NCDOR identified the ITIN contractor withholding issue as one of its top audit priorities because it was, and continues to be, concerned that businesses using ITIN contractors are not complying with the 4% withholding requirement. Because the construction industry is one of several industries using a significant number of ITIN contractors, the NCDOR has been especially aggressive in targeting construction companies for the ITIN contractor withholding audits. These audits can result in significant assessments of past due taxes, interest, and penalties.
Unfortunately, the NCDOR has not done a very good job of educating construction companies and their advisors about the ITIN contractor withholding requirement, so a lot of construction companies only learn about it as a result of an audit that results in unexpected and expensive consequences.
Please contact our office if you have any questions about required North Carolina income tax withholding. A link to Form NC 1099 ITIN can be found below.
Submitted by: Frank Williams
Source: North Carolina Department of Revenue (NCDOR)