Frequently Asked Questions About Withholding From Nonresidents for Personal
Services Performed in North Carolina
I - Definitions
What are "personal services?"
||The term "personal services" is not defined. However, income is generally
derived in two ways: selling a product or providing a service. "Personal
services" compensation is any compensation paid for providing a service.
For purposes of the 4% withholding, the personal services subject
to withholding are limited to personal services in connection with
a performance, an entertainment or athletic event, a speech, or the
creation of a film, radio, or television program.
What constitutes a "speech" for purposes of the 4% withholding?
|| Any speech that amuses, entertains, or informs is subject to the withholding
requirement. This includes instructors at seminars that are open to
the public for an admission fee or are for continuing education.
The definition of a nonresident entity refers to foreign limited liability
companies, partnerships, and corporations. What does the term "foreign"
||The term "foreign" means a limited liability company, partnership, or
corporation formed under the laws of any jurisdiction other than North
II - Exceptions to Withholding
What proof should a venue require from a nonresident limited liability
company or corporation that it has obtained a Certificate of Authority from
the North Carolina Secretary of State or from a nonresident partnership
that it has a permanent place of business in North Carolina?
||Corporations and limited liability companies that receive a Certificate
of Authority from the Secretary of State are also issued an identification
number. This number is different than the business's federal employer
identification number. The payer should request that the contractor
provide the identification number issued by the Secretary of State
and maintain that number in its records. For partnerships, the venue
should request that the partnership provide its federal identification
number and its North Carolina address and maintain that information
in its records.
What evidence should a payer obtain from a contractor that claims to be
||The payer should obtain from the contractor a copy of the contractor's
federal determination letter of tax exemption or a letter of tax exemption
from the Department of Revenue and maintain that information in its
What evidence should a payer obtain from an individual who claims to be
a resident of North Carolina?
||The payer should obtain the individual's North Carolina address
and social security number and maintain that information in its records.
Can a contractor provide an affirmation or other statement that it will
satisfy its income tax filing requirement and be exempt from withholding?
||No. The only exceptions to withholding are those identified in the
Exceptions to Withholding section of Directive PD-98-3. A contractor
that qualifies for one of the exceptions to withholding is still subject
to North Carolina income tax on the compensation received for services
performed in North Carolina and must file the appropriate North Carolina
income tax return to report the compensation.
If a contractor qualifies for one of the exceptions from withholding,
does the payer still issue a Form NC-1099PS to the contractor and to the
Department of Revenue?
||No. Form NC-1099PS is only required if North Carolina tax is withheld
from the compensation.
Can a contractor provide a statement or evidence to show that the 4%
withholding will be in excess of its tax liability?
||No. Any excess withholding will be refunded upon the filing of an income
tax return showing an overpayment of tax.
III - Contract Between Venue and Entertainer
Is a reimbursement for business expenses or a business expense allowance
included in compensation and subject to withholding?
||Pursuant to Treasury Regulation § 1.274-5T(h), the payment
of business expenses through a reimbursement or other expense allowance
is excludable from income by a contractor if the expenses are substantiated
to the payer by the contractor under an accountable plan. "Business
expenses" means ordinary and necessary expenses for travel, transportation,
and entertainment that are deductible under Internal Revenue Code
section 162. To be properly substantiated under an accountable plan,
the reimbursement must be paid only if receipts are furnished to
the expenses or the expenses are allowed under an acceptable per
diem arrangement. Those reimbursed or direct-billed business expenses
are not taxable pursuant to the above-cited regulation because they
have been properly substantiated are not subject to the 4% withholding.
If the venue pays business expenses directly instead of reimbursing the
contractor, is the amount paid subject to withholding?
||No, to the extent the expenses qualify as business expenses under Code
Is compensation paid to contract labor working at an athletic or entertainment
souvenir sales operation subject to withholding?
||Yes, if the contract laborer is a nonresident and the compensation
exceeds $1,500. The definition of contractor includes compensation
for personal services in connection with a performance, etc.
Services performed by the contract laborer at the souvenir sales operation
are in connection with the event.
A venue signs a $10,000 contract with a performer in 2007 for a performance
scheduled for 2008. The venue is required to place $2,000 in an escrow account
held by the performer's agent at the time the contract is signed. How much withholding
is required in each year?
||No withholding is required in 2007 because the compensation for performing
services in North Carolina was not paid during that year. Amounts held in
escrow are not considered to be received until released from escrow. The
venue must withhold $400 ($10,000 X 4%) in 2008 when the services are performed
and the compensation is paid.
IV - Contract Between Venue and Promoter (Agent)
If a venue contracts with a promoter to find an entertainer and the venue
enters into a separate contract with the performer, is the compensation
paid to the promoter by the venue subject to withholding?
||No, unless the promoter physically performed services in North Carolina.
If a venue contracts with a promoter to find an entertainer and the promoter
enters into a contract with the performer, is the compensation paid to the
promoter by the venue subject to withholding?
||The answer depends on whether the promoter is an entity or an individual.
If the promoter is an entity, tax must be withheld because the entity
is deemed to be doing business in North Carolina through its agent
(the entertainer). If the promoter is an individual, tax is only required
to be withheld from the payment to the promoter to the extent the
promoter performed services in North Carolina.
If a venue contracts with a promoter to find an entertainer and the promoter
enters into a contract with the entertainer, who is responsible to withhold
tax from the compensation paid to the entertainer?
||The promoter is responsible to withhold from the compensation paid
to the entertainer because the entertainer is providing a personal
service for the promoter.
Can a promoter that is responsible for withholding from the compensation
paid to an entertainer contract with the venue to withhold the tax?
A promoter rents a facility from a venue and contracts with a nonresident
entertainer. The venue sells tickets to the event and deducts the rent and
other fees and expenses from the gross ticket proceeds before payment to
the promoter. On what amount is withholding required?
||The Department of Revenue has no objection to a venue satisfying
a promoter's withholding responsibility if the venue is willing to
accept that responsibility. However, the promoter is the entity required
by law to withhold the tax and could be pursued by the Department
of Revenue for collection if the tax is not withheld or is withheld
but not remitted to the Department by the venue. A contractual provision
between the promoter and venue shifting the responsibility to the
venue is not binding on the Department since the Department is not
a party to the contract.
||No withholding is required from the ticket proceeds paid to the
promoter because the promoter is not providing a personal service
for the venue. The promoter is required to withhold from the compensation
paid to the entertainer because the entertainer is providing a personal
service in North Carolina for the promoter.
Last modified on:
10/31/07 03:26:57 PM.