Welcome | Step One: Getting Started | Step Two: Operating a Business | Step Three: Business Plan

Step Two: Managing Employees — North Carolina Tax Requirements

The forms included on the Small Business Interactive CD are current as of summer, 2005. You will want to check for changes to any of the forms on the Internal Revenue Service web site.

There are six different federal tax requirements for employers:

• Income Tax
• Unemployment Tax
• Retail Sales Tax
• Workers' Compensation Insurance
• New Hires Reporting
• Independent Contractor vs. Employee

Income Tax

North Carolina law requires withholding of income taxes from:

1. Salary and wages of all North Carolina residents regardless of where earned,
2. Wages of nonresidents for services performed in North Carolina ,
3. Non-wage compensation paid to nonresidents for certain personal services performed in North Carolina, and
4. Pension payments made to North Carolina residents if federal withholding is required on the payments.

To register with the state to receive your withholding number used for reporting and paying the tax, complete Form AS/RP1. This form is also used to register for your sales and use tax number (see below). Once you submit this form, the state will send you a coupon book to use to report and pay income taxes you have withheld from employees' pay.

• Instructions for the AS/RP1 Form

Each employee must complete a North Carolina Withholding Allowance Certificate, Form NC-4. Employers must withhold a portion of their employee(s)' income for North Carolina income tax based on the number of allowances the employees elects, the frequency of payroll periods, and amount of income paid per period. Refer to state tax table for details.

If your withholding liability for the month is less than $250, your withholding tax payments are due quarterly. If your withholding liability for the month is $250, but less than $2,000, your withholding payments are due monthly. If your withholding liability for the month is $2000 or more, your withholding tax payments are due semiweekly.

At the end of the year, you will use the NC Annual Withholding Form (form NC-3) to reconcile what you have withheld for all employees to what you have paid to the state. You will need to include a copy of all W-2 forms when you submit this Annual Withholding Form to the state.

To gain more information, please consult the North Carolina Department of Revenue's Income Tax Withholding Publication for information on withholding taxes. You may also call one of the following offices:

North Carolina Department of Revenue Office List

back to top

Unemployment Tax

The unemployment insurance program in North Carolina is part of a national system designed to provide temporary economic benefits to eligible workers. Eligible workers are individuals who:

1. Lost their jobs through no fault of their own,
2. Worked during a specified time period and received a minimum amount of wages during that time period,
3. Are able and available for work.
4. Are actively seeking new employment.

All benefits and administrative costs of the unemployment insurance program are paid by employers through State Unemployment Tax Act (SUTA) and the Federal Unemployment Tax Act (FUTA) payments. No money is withheld from workers' checks to pay for unemployment benefits .

If you answer yes to any of the following questions, you must pay the unemployment tax:

• Do you employ one or more employees (or 10 agricultural employees) during twenty weeks or more of the calendar year?
• Do you have $1500 or more in your quarterly payroll?
• Have you acquired a business subject to the unemployment tax?
• Are you subject to the FUTA?
• Are you a governmental operation or political subdivision?
• Are you an employee leasing company or temporary help company that, under contract, supplies individuals to perform services for clients or customers?
• Are you a 501(c)(3) non-profit organization with at least four workers in 20 different calendar weeks during a calendar year?

For more information, consult the ESC web site. For answers to specific questions regarding unemployment insurance, contact ESC Business Services. If you do not have Internet access, you may reach your local ESC office by phone. There are ESC field offices located throughout the state. For the location closest to you, consult your local phone book.

back to top

Retail Sales Tax

Businesses in North Carolina must pay a sales tax to the state on gross receipts from retail sales. The tax is noted to consumers and is added to the regular price of purchased goods. Currently the sales tax rate is generally 7.0% of which 4.5% is state tax, and 2.5% is county tax (3% in Mecklenburg County).

The North Carolina Department of Revenue defines retail sales as "sales to a customer or to any person for any purpose other than for resale." The tax may also apply to the lease of personal property and the renting of accommodations.

To determine what is required to be taxed, refer to the North Carolina Department of Revenue Sales & Use Tax Technical Bulletins.

To register with the state to receive your withholding number used for reporting and paying the tax, complete Form AS/RP1. Taxes must be paid quarterly if the tax is estimated to be less than $100 per month; paid monthly if estimated monthly taxes are $100 to $10,000, and paid semi-monthly if estimated taxes are over $10,000. For more information about frequency of payment, refer to the North Carolina Department of Revenue Filing Frequency & Due Dates chart.

• Instructions on completing the AS/RP1 form

Businesses subject to the sales tax must submit a sales tax report on form E-500, with payment regardless of whether they had taxable sales. You will receive a coupon book with enough forms for the year when you send in the AS/RP1 forms referred to above. The sales tax form and payment should be mailed to: NC Department of Revenue, P.O. Box 25000 , Raleigh , NC 27640-0100 .

For more information about sales tax in North Carolina , contact the Department of Revenue at 1 (877) 252-3052.

• North Carolina Department of Revenue FAQs About Sales & Use Tax
  

back to top

Workers' Compensation Insurance

Workers' Compensation is not a tax, but a type of insurance that most employers in North Carolina must have. This insurance provides compensation and medical benefits to an employee or his or her dependents if the employee becomes disabled or dies from an accidental injury or disease acquired due to employment.

In general, any employer with three or more regular employees is required to provide worker's compensation insurance. The employee pays no portion of this insurance.

Employers required to have worker' compensation insurance must prominently display the Workers' Compensation Notice.

There are three methods of obtaining insurance:

1. Purchase and maintain a workers' compensation policy from a company licensed in North Carolina.
2. Apply to the North Carolina Department of Insurance for approval as an independent self-insurer;
3. Become a member of a group self-insurance association licensed by the North Carolina Department of Insurance.

Questions concerning the requirements and rights under the Workers' Compensation Act should be addressed to the Industrial Commission, a division of the NC Department of Commerce, at 1 (800) 688-8349.

back to top

New Hires Reporting

Under North Carolina State Law, G.S. 110-129.2, and the Federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) all public, private, non-profit, and government employers are required to report newly hired, re-hired, and temporary employees in North Carolina to the North Carolina State Directory of New Hires. The form to use is called a NC New Hire Reporting Form. This form may be mailed in or submitted online at the North Carolina Directory of New Hires.

For more information refer to the North Carolina New Hires FAQ page or call 1 (888) 514-4568.

back to top

Independent Contractor vs. Employee

Employers should be aware of the difference between independent contractors and employees. Classifying an individual as an independent contractor can make a big difference in terms of federal, state and local requirements; and federal, state and local taxes. According to the IRS, the following factors indicate someone is an independent contractor:

• The worker hires, supervises and pays his/her assistants;
• The worker is free to work when and for whom he/she wants;
• The work is done on the worker's premises;
• The worker is paid by the job or on straight commission;
• The worker has the risk of profit or loss;
• The worker does work for several businesses at one time;
• The worker's services are available to the general public; and
• The worker can't be fired except for breach of contract.

(Source: IRS)

If you hire an independent contractor, you should have them complete an IRS Form W-9 before you pay them the first check. This form requires that they give you pertinent information under penalties of perjury that you will need to complete the IRS Form 1099 at the end of the year. The 1099 is required if you pay anyone who is not your employee and is not incorporated $600 or more cumulative for the year.

For more information, consult your local IRS field office. Refer to the Small Business Center Interactive CD for a list of other helpful sites related to Employees.

back to top