North Carolina requires withholding of 4% personal service tax from payments to non-North Carolina resident entities or individuals for personal services performed in North Carolina. Personal services for the purposes of withholding this tax are limited to services in the connection with a performance, an entertainment or athletic event, a speech that informs or amuses, or the creation of a film, radio, or television program.
The following must be true in order to withhold:
- The total payment within one calendar year exceeds $1,500. Withholding begins with the first installment for a contract where the total contract exceeds the threshold or with the first payment that causes the cumulative total to exceed the threshold.
- The services fall into one of the categories described above and were performed in NC by an individual who does not have a permanent residence in NC or by an entity that is formed under the laws of a jurisdiction other than NC.
This tax is assessed on payments to both individuals and businesses, including corporations. The only exceptions are as follows:
- Companies that are exempt from Federal Income Tax (such as non-profit organizations) are also exempt from personal service tax withholdings. A copy of the determination letter from the IRS that states the company is exempt from Federal Income Tax should be sent to Accounts Payable prior to payment.
- A corporation or limited liability company that can provide the University with a Certificate of Authority to transact business in the State of North Carolina, issued by the NC Secretary of State. This Certificate of Authority places the liability of remitting the NC personal service tax on the holder of the Certificate.
- If we contract with a promoter to find an entertainer but enter into a separate contract with the entertainer, then the finder’s fee paid to the promoter is not considered a service performed in NC, but rather in the state the promoter is located. However, the fee paid to the entertainer is still subject to the tax, if other listed criteria are met.
If withholding applies, then 4% of the total amount requested will be withheld and remitted to the NC Department of Revenue. If the requesting department wishes for the payee to receive the full contract amount, they can request for the payment to be “grossed-up” to compensate for the taxes; however, the department will be responsible for the additional amount to gross-up the payment.