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North Carolina Business Tax – Complete Guide

When you start a new company in any state in the USA including North Carolina, your company will be subjected to some form of business tax. The type of taxes will vary from one state to another and businesses must be compliant with both federal and state taxes. Many states also have local taxes. The type of North Carolina business tax your company needs to file will vary according to the type of business structure you have chosen. We created this article to provide information and guidance on the various taxes applicable in this state, business tax rates, using a North Carolina business tax Calculator, and how different businesses will be taxed.

North Carolina Business Tax

There are several types of taxes that businesses are required to file in America. Federal taxes are applicable across all 50 states, followed by state business taxes, which vary from one state to another. Whether you start a domestic entity or a foreign company, taxes are considered to be mandatory annual requirements. Similarly, the North Carolina business taxes are applicable to entities formed and operating within the state. The tax rates in NC will be different from that of other states and you may need a North Carolina business tax calculator to enable tax planning, accounting, and bookkeeping.

What taxes do businesses pay in North Carolina?

North Carolina has been attracting entrepreneurs and investors due to its pro-business environment. The North Carolina business tax climate is also considered to be favorable and has one of the lowest corporate income taxes in the nation. The state has a lower corporate income tax compared to Colorado (4.6%), South Carolina (5%), Florida (5.5%), and New York (7.3%), among others. You can form different types of domestic and foreign entities in North Carolina including a limited liability Company, a sole proprietorship, a C-Corporation, a partnership, and an S-Corporation. Each entity type will have a different tax status in this state. Your company may be required to file a single type of state taxes or multiple business taxes and you may need a North Carolina business tax calculator to determine the amount of taxes due. Let’s try to understand the different types of taxes applicable to new and existing businesses in this state.

North Carolina income tax

There are different categories for North Carolina business taxes and one of them is income tax. There are two types of income taxes that may be applicable to businesses which include:

  • Individual income tax – This type of tax has to be filed by individual taxpayers. Some entity structures require an individual income tax return to be filed like a sole proprietorship or a limited liability company. You can use the individual income tax estimator provided by the North Carolina Department of Revenue to calculate your annual tax return.
  • Corporate income tax – The corporate income tax is levied on the net taxable income of all North Carolina corporations – both domestic and foreign. The tax rate is flat 2.50 percent for all entities. You can use a North Carolina business tax Calculator to determine your corporation’s payable taxes. It is important to note that certain corporations that have been organized under Chapter 55A will be exempt from corporate income taxes.

Employer taxes

One of the North Carolina business tax classifications is employer taxes. This tax can be applied to businesses that have employed a skilled, semi-skilled, or unskilled workforce. The tax rate for all employers is determined using an experience rating formula. This formula is based on economic conditions and hence the tax rate can vary from 0.060% to 5.760%. The base rate for employer taxes in a given year is determined by the solvency of the Unemployment Insurance Trust Fund. The employer taxes can be applicable as North Carolina LLC taxes as well as any other entity based in the state.

Franchise or Privilege tax

The franchise tax is also known as a privilege tax. This tax is placed on various entities for the privilege of conducting business in North Carolina. The North Carolina franchise tax typically applies to C-Corporations and S-Corporations. The tax rate varies depending on the entity type. For example, the rate for a C-Corporation is $1.50 (one dollar and fifty cents) per $1,000 (one thousand dollars). The minimum franchise tax can also vary according to tax year, and will also be different for Holding Companies. You will need to use a North Carolina business tax Calculator to derive the amount of taxes payable.

North Carolina sales and use tax

One of the important taxes apart from the North Carolina franchise tax is the sales and use tax. 2020 North Carolina General Statutes, Chapter 105 – Taxation, Article 5 governs this tax in the state. This form of North Carolina Corporation taxes is applicable for any entity that sells tangible personal property, pursuant to NC Gen Stat § 105-164.4 (2020). This type of property is defined as any personal property that can be weighed, seen, felt, measured, or can be perceptible to the senses.

The list of such properties is quite extensive and includes prewritten computer software, electricity, gas, water, and steam among others. The sales and use tax is a type of North Carolina business tax that is also imposed on retailers as well as certain facilitators like on the selling price of certain digital property and gross receipts derived from installation, maintenance, and repair services. The sales and use tax rates can vary according to the city, town, and county.

Excise tax

Excise tax, unlike North Carolina franchise tax, is applicable only for selling or using specific products, services, or property. This type of North Carolina LLC tax includes several types of taxes like the Alcoholic Beverages Tax, Piped Natural Gas Tax, and Tobacco Products Tax among others. Let’s look at an example to understand this.

Example: If you are planning to sell alcoholic beverages in North Carolina then excise tax will be applicable. This type of North Carolina business tax is levied on all alcoholic beverages including wine, which is sold in the state as well as those shipped into this state. The excise tax rate will vary according to the nature of business like the tax rate on liquor will be different from that of a brewery or winery.

Are you thinking of forming a new business in North Carolina?

How North Carolina Businesses are Taxed

Once you form a new business in North Carolina, you will need to maintain compliance with all annual state requirements. Flint taxes one of the major annual requirements. The type of North Carolina business tax that your company is required to file will depend on the company’s type of entity structure. Your business may be required to file more than one form of state or local business taxes. Let us look at the different types of entities and their tax obligations in this state.

Taxes for an LLC

If you are planning to register a limited liability company in North Carolina then for tax purposes, it will be considered a pass-through entity. This simply means that instead of filing North Carolina business tax or corporate tax, you will be required to file a personal income tax at a rate of 4.75 percent. This is because, for a pass-through entity, the business income passes through to the owners and other members. There are several other North Carolina LLC taxes that you may be required to file depending on the business activity and other aspects of the business.

It is important to note that if a limited liability is treated as a C-Corporation for federal tax purposes, then such an entity will be required to file a North Carolina franchise tax. If your company has hired one or more employees, then the LLC may be subjected to the employment security tax or payroll tax. Occupational license taxes may also be levied by the county and municipal governments, depending on the primary occupation. Apart from this, another one of the important North Carolina LLC taxes is the sales and use tax, which may be applicable especially if you are selling specific products or have a retail store.

Taxes for a C Corporation

If you plan to incorporate in North Carolina then you will be required to file corporate taxes and the North Carolina franchise tax. The good news is that the current tax rate for corporate taxes is one of the lowest in the nation at 2.5 percent. The franchise tax has a variable rate with a minimum franchise tax of $200 for those C Corporations whose tax years started on or after January 1, 2017. The current tax rate is $1.50 per $1,000.

The North Carolina General Statutes Chapter 105, Taxation § 105-125 states that all active, inactive, domestic, and foreign corporations have to file the North Carolina franchise tax unless they are exempt from the taxes. There are several other North Carolina Corporation taxes that you may have to file like:

  • Withholding Tax – If your company has employees then you must file this tax return.
  • Employment Security tax – This is also known as payroll tax and the tax rate would be 1.20 percent in the first 2 years. This tax has to be paid quarterly.
  • Privilege tax on machinery – If you are in the manufacturing industry or any industry that requires the use of specific machinery then this tax would be applicable. This tax rate is 1% of the sales price.
  • Sales and Use tax – These important North Carolina Corporation taxes are applicable if you fulfill certain criteria such as selling tangible personal property through retail, facilitating accommodation rental, and selling taxable service contracts among others.

Taxes for S Corporation

If you’ve started an LLC or a C-Corporation and have chosen to elect S-Corporation tax status, then as a benefit, you will not be subjected to corporate income taxes. An S-Corporation is a pass-through entity like an LLC. Therefore, instead of filing North Carolina Corporation taxes, each member or owner would be required to file personal income taxes.

S-Corporations are also subjected to the North Carolina franchise tax. The franchise tax rate effective January 1, 2019, is $200 for the first $1,000,000 (one million dollars) of the corporation’s tax base. If the tax base exceeds one million dollars, then the tax rate will be the same as that of a C-Corporation. Apart from this, the S-Corporation will be subjected to any taxes of an LLC or C-Corporation that was applicable prior to S-Corporation election status.

Taxes for a Sole Proprietorship

If you form a sole proprietorship in North Carolina then you will need to report your profits by filing individual income tax returns. You can file this electronically (eServices) or by mail. You will be required to file the return if the Federal gross income exceeds $12,750. Apart from this, depending on the type of activity, you may be required to file North Carolina business tax in the form of withholding tax, sales and use tax, and property tax among others.

Taxes for Partnerships

If you form a partnership company in North Carolina then the applicable taxes would be similar to that of taxes for sole proprietorships or North Carolina LLC taxes. Partners will be required to file individual tax returns based on the income they have earned through the business. If you are selling specific products or services then you will be required to file sales and use tax. You may also be required to file property tax, withholding tax, and occupational license tax among others.

Ready to Incorporate your North Carolina Company?

North Carolina provides just the right business environment for entrepreneurs and first-time business owners. You can choose to form different types of entities right from partnership firm to a limited liability company, sole proprietorship, C-Corporation, and S-Corporation. Whatever the entity type, you will need to ensure that the company is compliant with all annual requirements including the North Carolina business tax. IncParadise can provide meaningful assistance where taxes and annual requirements are concerned.

IncParadise is one of the top incorporation service providers in the state and we can help you form or register your LLC or corporation in North Carolina. IncParadise also offers additional services to fulfill all types of business related requirements including foreign qualification, annual report, and filing DBA among others.

Do you want to start your company in North Carolina?