Special Alert – North Carolina – Expansion of Requirement to Withhold State Income Tax from Certain Non-Wage Compensation Recipients
Effective January 1, 2020, the North Carolina Department of Revenue has expanded the income tax withholding requirements for payments made to certain non-wage compensation recipients. The amended withholding requirements were included with Senate Bill 523 and specifically relate to N.C. Gen. Stat. §105-163.3. The current law requires a business (the “payer”), who pays amounts in excess of $1,500 during a calendar year to a non-resident or ITIN contractor (the “payee”), to withhold 4% of the compensation. The updated statute expands upon the definition of a payee to include the following recipients:
- Any payee who performs services within North Carolina that fails to provide the payer a taxpayer identification number
- Any payee who performs services within North Carolina that fails to provide the payer a valid taxpayer identification number (the payer will be notified by the Department of Revenue that the TIN is invalid)
- Any ITIN contractor that has applied to receive an Individual Taxpayer Identification Number (“ITIN”)
- Any ITIN contractor that has an expired ITIN
The amended statute also provides additional guidance and clarity regarding the application of the $1,500 withholding threshold. It requires the payer to anticipate future payments and if, the payer expects to pay more than $1,500 during the calendar year to any one payee, then withholding is required on all payments made during the year to that payee. If, at the time a payment is made, there is no expectation of the payments to that payee exceeding $1,500 during the calendar year, then there is no withholding requirement related to that payment.
Please note that, as before, there are exceptions to withholding when certain criteria are met as described in the statute.
For further information, please reach out to a trusted advisor with any questions or concerns regarding these new requirements.