Is Labor Taxable in North Carolina?
Navigating North Carolina's tax rules for work and services. Learn which labor is subject to income or sales tax in NC.
Navigating how “labor” is taxed in North Carolina can be complex, but understanding these rules is crucial for individuals and businesses. Taxation varies significantly based on the nature of the work performed and its categorization by tax authorities. Knowing these distinctions ensures compliance with tax regulations.
Income Tax on Wages and Salaries
Income from employment, such as wages and salaries, is subject to North Carolina state income tax. This applies to both residents of North Carolina and non-residents working within the state. Taxable income is calculated after accounting for various deductions and exemptions.
North Carolina uses a flat tax rate for individual income tax, applying the same percentage to all taxable income. For the 2024 tax year, the rate is 4.50%. This rate is projected to decrease to 4.25% in 2025 and 3.99% by 2026.
Sales and Use Tax on Services
North Carolina generally does not impose sales tax on most services. This means many common services, such as professional services like legal or accounting advice, personal services like haircuts, and real property services like landscaping or construction, are exempt from sales and use tax.
However, specific categories of services are subject to North Carolina sales and use tax, as outlined in N.C. Gen. Stat. § 105-164.4. These include repair, maintenance, and installation services for tangible personal property or certain digital property. Examples include vehicle repair, appliance repair, computer repair, and HVAC installation. Certain digital property and services, such as streaming services and digital goods, are also taxable.
Extended warranties and service contracts are considered taxable. Additionally, the labor component of transactions involving taxable tangible personal property may be subject to sales tax. Telecommunication services and ancillary services are also taxable.
Business Responsibilities for Taxable Services
Businesses providing taxable services must comply with North Carolina tax law. The initial step is to register with the North Carolina Department of Revenue (NCDOR) to obtain a Certificate of Registration. This registration is a prerequisite for collecting sales and use tax and can be completed online or by mail, with no fee charged for this process.
Once registered, businesses are responsible for collecting sales and use tax from customers on all taxable services rendered. These collected taxes do not belong to the business but are held in trust for the state. Businesses must then accurately report and remit them to the NCDOR by filing sales and use tax returns, typically Form E-500.
The NCDOR assigns the frequency of reporting and remittance (monthly, quarterly, or annually) based on the business’s sales volume and tax liability. Businesses must maintain accurate and comprehensive records, including gross income, gross sales, net taxable sales, and documentation for any exempt transactions, to substantiate their tax liability.