Financial Services Policy 7.9 – Nonresident Individuals and Businesses

The 1997 session of the General Assembly enacted legislation which requires the University to withhold 4% for State income tax on non-wage compensation paid to nonresident (i.e. out-of-state) contractors for personal services unless certain criteria are met.

The tax withholding requirement applies to payments made on or after January 1, 1998. The tax withholding requirement does not apply to purchases of goods, but rather is limited to the purchase of services. Also the new tax withholding requirement does not affect the payments of salaries and wages made to University faculty, staff, student, and temporary employees. The new requirement does affect payments made to independent contractors, partnerships, corporations, and other businesses. Payments for personal services are currently processed several ways. The Contracted Services/Honoraria (form BANCPS), Expenditure Authorization (form BANCPS), and the Purchase Requisition can be used to pay for some form of personal services. The Accounts Payable department will review the disbursements made using these various methods and ensure that the new tax withholding and reporting requirements are followed.

Frequently Asked Questions:

Who does the State income tax withholding requirement apply to?

Nonresident Individual: The withholding requirement applies to an individual who does not reside in North Carolina.

Nonresident Entity: The withholding requirement applies to nonresident entities which are defined as:

  • a foreign* limited liability company
  • a foreign limited partnership or a general partnership formed under the laws of any jurisdiction other than NC
  • a foreign corporation

*For purpose of this legislation, “foreign” means out-of-state.

What types of payments are subject to tax withholding?

Nonresident Individual: Non-wage compensation payments for personal services performed in NC are subject to the withholding requirement.

Nonresident Entity: Non-wage compensation payments for personal services performed in NC are subject to the withholding requirement.

Are all personal services subject to withholding?

Nonresident Individual: Withholding is required only if compensation is for services performed in North Carolina. The “duty day” method should be used to allocate compensation for services performed both in NC and other states. Refer to the explanation regarding the “duty day” allocation method listed below.

Nonresident Entity: Withholding is required only if compensation is for services performed in North Carolina. The “duty day” method should be used to allocate compensation for services performed both in NC and other states. Refer to the explanation regarding the “duty day” allocation method listed below.

What is the State income tax withholding rate for these payments?

Nonresident Individual: 4% of the non-wage compensation amount.

Nonresident Entity: 4% of the non-wage compensation amount.

What is the effective date for the withholding requirement?

Nonresident Individual: January 1, 1998 for all personal services.

Nonresident Entity: The effective date depends on the type of personal services being provided.

  • January 1, 1998 for personal services related to a performance, an entertainment or athletic event, the creation of a film or a TV program, or the construction or repair of a building or highway.
  • January 1, 1999 for all other personal services.

Are there any exceptions to the withholding requirement?

Nonresident Individual: Yes. Payments to ordained or licensed members of the clergy are not subject to withholding.

Nonresident Entity: Yes. Tax is not withheld from:

  • a limited liability company that has obtained a certificate of authority from the NC Secretary of State,
  • a foreign limited partnership that has a permanent place of business in NC,
  • a foreign corporation that has obtained a certificate of authority from the NC Secretary of State.

How can a certificate of authority be obtained?

Nonresident Individual: A certificate of authority does not apply to individuals.

Nonresident Entity: A certificate of authority does not apply to partnerships. A limited liability company or foreign corporation may obtain an application for a certificate of authority by:

  • writing to the Secretary of State, Corporations Division, 300 N. Salisbury Street, Raleigh, NC 27603-5909
  • faxing the Secretary of State at (919) 733-1837,
  • downloading from the Secretary of State’s website.

How does a nonresident document that they have an exception to the withholding requirement?

Nonresident Individual: Withholding is not required if individuals provide the University with their NC address and social security number.

Nonresident Entity: Withholding is not required if:

  • a limited liability company provides its certificate of authority number obtained from the Secretary of State,
  • a foreign limited partnership provides its NC address and Federal tax identification number,
  • a foreign corporation provides its certificate of authority number obtained from the Secretary of State.

Who will report the tax information to nonresident contractors and Federal and State tax officials?

Nonresident Individuals: Accounts Payable will issue a Federal form 1099-MISC by each January 31 to report the non-wage compensation amount and tax withholdings for the University funds. Tax reporting for funds of affiliated organizations will be the responsibility of the affiliated organization.

Nonresident Entity: Accounts Payable will issue a Federal form NC 1099-P.S. by each January 31 to report the non-wage compensation amount and tax withholdings for University funds. Tax reporting for funds of affiliated organizations will be the responsibility of the affiliated organization.

Which University department will withhold and remit the taxes?

Nonresident Individual: Accounts Payable (AP) will revise its procedures and the AP system will be modified to accommodate the new State income tax withholding requirement for University funds.Withholding and remitting taxes for disbursements of funds of affiliated organizations will be the responsibility of the affiliated organizations.

Nonresident Entity: Accounts Payable (AP) will revise its procedures and the AP system will be modified to accommodate the new State income tax withholding requirement for University funds.Withholding and remitting taxes for disbursements of funds of affiliated organizations will be the responsibility of the affiliated organizations.

Explanation: A “duty day” is any day or part of a day in which an activity connected with the service is performed. The nonresident contractor’s compensation which is subject to withholding is determined by allocating the total compensation to the duty days spent in NC rendering services and to the duty days spent outside NC rendering services. For example, assume a nonresident corporation contracts for $10,000 to provide an architectural design for a University building being constructed. The corporation’s representative spends one day on campus to view the construction site and discuss potential designs, spends eight days outside NC drawing the designs, and one day on campus presenting the designs. The amount of withholding would be $80 which represents 4% of $2,000. The amount of $2,000 is subject to withholding since two days were spent working in NC at a fee rate of $1,000 per day. The vendor will need to indicate on the invoice the number of duty days in NC and outside of NC. The absence of such information will necessitate withholding on the entire amount.