North Carolina Small Business Tax Guide: Complete Overview

As a small business owner or entrepreneur in North Carolina, understanding your tax obligations is crucial for maintaining compliance and financial health. The Tar Heel State has specific regulations that affect how you operate and plan for your business's future, from income tax and franchise tax to sales tax and payroll requirements.

This comprehensive guide breaks down everything North Carolina small business owners need to know about their state tax responsibilities, deadlines, potential savings opportunities, and common compliance pitfalls to avoid.

Introduction to North Carolina Small Business Taxes

Why paying attention to taxes matters for your NC business

Tax compliance is about avoiding penalties and maintaining your business's financial stability and legal standing. North Carolina businesses face a range of tax obligations depending on their structure and activities. Ignoring or mismanaging these responsibilities can lead to substantial penalties and interest charges from the North Carolina Department of Revenue (NCDOR), tax liens, and personal and reputational damage.

North Carolina's tax environment is evolving, presenting challenges and opportunities for businesses that embrace strategic guidance.

Taxes Applicable to Small Businesses in North Carolina

Basic tax obligations for NC small businesses

The taxes your North Carolina business must pay depend primarily on your entity structure and business activities.

Income tax

North Carolina levies income tax differently based on your business structure. Pass-through entities (sole proprietorships, partnerships, S corporations, and most limited liability companies called LLCs) where Income "passes through" to owners' personal returns and is taxed at the state's flat personal income tax rate of 4.5%. C Corporations are currently taxed at a flat 2.5%, phasing out by 2030.

Franchise tax and sales tax

Beyond income tax, North Carolina businesses may face a franchise tax, or "privilege tax," imposed on C and S corporations for the right to do business in the state. It's calculated based on your company's net worth or property in the state, with a minimum tax of $200. Businesses may also face a sales and use tax, requiring you to collect state sales tax (4.75%) plus applicable local taxes (which can bring the combined rate up to 7.25% in some counties). Economic nexus rules require even out-of-state businesses to collect tax if they exceed $100,000 in NC sales or have 200+ transactions in the state.

Services with state-specific expertise, like 1-800Accountant, can help manage sales tax complexities, including nexus monitoring and filing across different NC municipalities.

Payroll taxes: Withholding and unemployment

If you have employees in North Carolina, you'll need to register for state income tax withholding with the NCDOR (using Form NCBR), withhold state income tax from employees' wages based on their NC-4 forms, file withholding returns (Form NC-5) and remit the taxes on the schedule assigned by NCDOR, register with the Division of Employment Security (DES) for unemployment insurance (UI) tax, and file quarterly UI reports (Form NCUI-101) and pay UI taxes. 

Types of Business Taxes in North Carolina

Primary state taxes in NC

North Carolina businesses may face several different types of state taxes:

Franchise tax

Applies to C corps and S corps and is calculated on the largest of three bases (net worth, property investment, or appraised value)—the minimum annual tax is $200.

Sales and use tax

North Carolina's sales tax structure includes a state tax rate of 4.75% and local (county) taxes ranging from 2% to 2.5% for total combined rates between 6.75% and 7.25%. The use tax applies to items purchased from out-of-state vendors when no sales tax was collected, at the same rate as sales tax.

Excise and other taxes

Certain industries face specific excise taxes on goods like fuel, alcohol, and tobacco. Recently, North Carolina implemented a 1.5% excise tax on ride-sharing platforms. Understanding which industry-specific taxes apply to your business is crucial for compliance.

How Your Business Setup Affects Your Taxes

Why your business type matters for taxes

Your business structure fundamentally shapes your tax obligations in North Carolina. Let's explore how each entity type is taxed.

How are sole proprietors and partnerships taxed?

Sole proprietorships and partnerships don't pay business-level income taxes. Instead, taxable income and losses flow directly to owners' personal tax returns (Form D-400), with owners paying the 4.5% personal income tax rate on their business income. Partnerships file an informational return (Form D-403) and issue Schedule NC K-1s to partners. Legislation allows partnerships with trust partners to elect entity-level taxation.

How are LLCs taxed?

LLCs are flexible for tax purposes and can even elect to be taxed as a corporation. Single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. Both benefit from pass-through taxation at North Carolina's 4.5% rate. 

Tax advisors at 1-800Accountant can assist with timely S corporation elections, which must be made within 75 days of formation, to potentially reduce self-employment taxes.

How are C corporations taxed?

C corporations in North Carolina face a  2.5% corporate income tax on their net income (Form CD-405), the annual franchise tax, and double taxation. There is a planned phase-out of corporate income tax by 2030

How are S corporations taxed?

S corporations offer a hybrid approach that generally avoids entity-level income tax. This entity passes income and losses to shareholders via Schedule NC K-1, and shareholders report their share of income on personal tax returns (Form D-400). They must also file Form CD-401S and pay the annual franchise tax. 

Working with entity formation specialists can help ensure you choose the most tax-advantageous structure for your specific situation in North Carolina.

Personal Income Taxes as a Business Owner

How business income shows up on your personal taxes

For owners of pass-through entities, business income flows to their personal tax return. NC has a flat 4.5% individual income tax rate, income is reported on Form D-400, and you'll receive a Schedule NC K-1 detailing your share of the business's income and losses. 

Strategies to combat potentially expiring federal deductions

With the federal 20% Qualified Business Income Deduction scheduled to expire in 2025, North Carolina pass-through businesses could face significantly higher effective tax rates than C corporations benefiting from the state phase-out. Potential planning strategies include income deferral, expense timing optimization, entity restructuring analysis, and retirement plan contributions.

Filing and paying your personal income tax

File using Form D-400 by April 15th, consider electronic filing through NCDOR's eFile system, and make quarterly estimated tax payments (Form NC-40) if you expect to owe more than $1,000. 

Tax Specifics for Partnerships

State tax requirements for NC partnerships

Partnerships in North Carolina file Form D-403, an informational return reporting the business's income and deductions, which are passed through to partners, who pay tax at the individual 4.5% rate. Schedule NC K-1s are issued to all partners for their returns. This entity type must pay withholding tax on behalf of nonresident partners, and can now elect entity-level taxation if they have trust partners.

Filing and paying taxes for partnerships

File Form D-403 by the 15th day of the 4th month after year-end (April 15 for calendar-year filers) and include Schedule NC K-1 for each partner. Electronic filing is required for partnerships with 25+ partners. Remit nonresident withholding payments according to NCDOR schedules. 

Understanding Corporate Income Tax

How income tax works for corporations

C corporations face a unique tax structure in North Carolina. The current flat corporate income tax rate of 2.5% on NC net income is apportioned based on the NC sales factor. Corporate income tax is scheduled to phase out entirely by 2030. This phase-out creates potential future advantages for C corporations compared to pass-through entities, especially if the federal 20% Small Business Deduction expires in 2025.

Filing and paying corporate income tax

C corporations file Form CD-405 and S corporations file Form CD-401S, due by the 15th day of the 4th month after year-end (April 15 for calendar-year filers). Electronic filing and payment are generally required, and quarterly estimated payments (Form CD-429) are required for anticipated tax liabilities above $500. 

Comprehensive tax services like 1-800Accountant manage the preparation and electronic filing of corporate returns covering income and franchise tax.

Understanding Franchise Tax

What is franchise tax and how is it calculated?

North Carolina's franchise tax is a privilege tax imposed only on corporations. It is calculated at $1.50 per $1,000 of the largest of three bases, including the North Carolina apportioned net worth, 55% of appraised property value in NC, and actual investment in NC tangible property. The minimum annual tax is $200.

Filing and paying franchise tax

Reported on the same form as corporate income tax (CD-405 for C Corps, CD-401S for S Corps) and is due on the same date as your corporate income tax return. Payments are made electronically through NCDOR.

Understanding Sales and Use Tax

What is sales and use tax?

North Carolina imposes sales tax on tangible personal property, certain digital property (software, music, movies), and specifically enumerated services (repair, maintenance, installation services). Use tax applies when you purchase taxable items tax-free (typically from out-of-state) but use them in North Carolina.

Collecting sales tax: Understanding nexus

You must collect North Carolina sales tax if you have a physical nexus (An office, warehouse, or other physical presence in NC) or an economic nexus with more than $100,000 in gross sales to NC or  200+ separate transactions into NC in the current or previous calendar year. Businesses meeting these thresholds must register and begin collecting tax within 60 days. Marketplace facilitators (like Amazon, eBay, Etsy) are responsible for collecting and remitting sales tax on behalf of their sellers.

What happens if you don't collect sales tax?

Failing to comply with sales tax obligations can result in liability for all unpaid taxes, penalties up to 25% for failure to file and 10% for failure to pay, interest charges, and personal liability for owners, officers, or managers for these "trust fund taxes."

Find your correct sales tax rate

North Carolina uses destination-based sourcing, meaning you charge tax based on where the customer receives the product. The state rate is 4.75%, local rates vary by county (typically adding 2-2.5%), with combined rates ranging from 6.75% to 7.25%. 

How to get your sales tax permit

Before making taxable sales in North Carolina, register for a sales and use tax account through NCDOR's website using Form NCBR, receive your Certificate of Registration (sales tax permit), and display it in your business. 

What is the streamlined sales tax (SST) program?

North Carolina, along with nearly half the states in America, is a full member of the SST, which strives to create simplified, uniform sales and use tax systems. Businesses, particularly remote sellers, can register for sales tax in multiple SST member states through the centralized SST registration system (SSTRS). Volunteer sellers using the SST system may be eligible to use Certified Service Providers (CSPs) approved by SST to manage their sales tax calculation, collection, and remittance obligations, often at no cost to the seller for SST states.

Tax-free sales

Common tax-free items in North Carolina include sales for resale (requires resale certificate), prescription drugs, certain medical devices, motor vehicles (subject to Highway Use Tax instead), and certain items purchased by qualifying farmers or manufacturers for production.

Most services are not taxable unless specified by North Carolina law, including admissions, repair/maintenance/installation services to tangible personal property, laundry/dry cleaning, telecommunications, and video programming. Professional services, including virtual accounting, legal, and consulting, aren't typically taxed. Groceries intended for home consumption in North Carolina are generally taxed at a reduced 2% state rate and are exempt from local sales tax. Most other food items (prepared foods, restaurant meals, candy, soft drinks) are taxed at the combined state and local rate.

Tax-free sales and exempt customers

Certain sales are exempt from North Carolina sales tax, including sales for resale (with a valid resale certificate), sales to tax-exempt organizations (government, qualifying non-profits), certain manufacturing equipment and inputs, and prescription medications and specific medical devices. When making exempt sales, you must collect a properly completed Certificate of Exemption (Form E-595E) and maintain it in your records.

Sales tax holidays

North Carolina has no annual general sales tax holiday for items such as clothing or school supplies. A previous state tax holiday was repealed.

How and when to file your sales tax returns

File Form E-500 electronically through NCDOR's eFile system based on your filing frequency (monthly, quarterly, or semi-annually), assigned by NCDOR based on tax liability. Monthly returns are due by the 20th of the following month, and quarterly returns are due by the last day of the month following quarter-end. File a return for every period, even if no tax is due ("zero return").

Tax services can manage the entire electronic filing process for Form E-500, adhering to the correct frequency assigned by NCDOR.

Early filing discount

Businesses that electronically file their sales and use tax return (Form E-500) and pay the tax due on or before the deadline are eligible for a small discount on the state portion of the tax collected. The discount is a percentage of the 4.75% state tax collected. The discount is capped at a maximum amount per reporting period. The discount, however, does not apply to local taxes collected or use taxes owed and is forfeited if the return or payment is late.

Sales tax on shipping and handling

Shipping, delivery, freight, handling, and postage charges associated with the sale of taxable tangible personal property or digital property are generally considered part of the sales price. They are subject to sales tax in North Carolina, even if stated separately. Delivery charges for tax-exempt items generally aren't taxable. 

If a shipment includes both taxable and non-taxable items, the seller can either tax the entire shipping charge or allocate the charge (e.g., based on the sales price or weight of the taxable items vs. non-taxable items) and only tax the portion allocated to the taxable items. Proper documentation of the allocation method is required. 

Sales tax obligations when closing your business

As they wind down, businesses ceasing operations in North Carolina have obligations to the state. They must file a final sales and use tax return with the NCDOR, and mark it as "final."  All outstanding sales and use tax liabilities must be paid in full before closure, including collected tax not yet remitted and any use tax owed. The business must formally request cancellation of its sales and use tax account and permit with the NCDOR, typically done through the online portal or by submitting the appropriate section of the NC-BR form.

A Quick Checklist for Filing and Paying NC Business Taxes

Step 1: Figure out which taxes apply to you

Identify applicable taxes based on your business structure, activities (selling goods/services, employing workers), location (nexus considerations), and industry-specific obligations. 

Step 2: Register for the right tax accounts

Register with NCDOR using Form NCBR for income, franchise, sales, and withholding taxes. Register separately with DES for unemployment insurance and obtain all necessary account numbers and permits.

Step 3: Keep meticulous records

Maintain detailed records of your income and expenses, sales (taxable vs. non-taxable), purchases (for use tax compliance), payroll information, exemption certificates, and business assets. 

Step 4: File your taxes online and on time

Use NCDOR's electronic filing systems to file, remember to mark deadlines on your calendar, and file all required returns, even if no tax is due.

Full-service tax preparation from 1-800Accountant ensures your NC returns are filed accurately and electronically by their deadlines.

Step 5: Pay what you owe by the deadline

Make payments for anything your business owes electronically, consider estimated payments and obligations if required, and implement a plan for tax obligations to maintain cash flow. 

Mark Your Calendar: Key Tax Deadlines

When are taxes usually due?

Use this guide to determine filing deadlines for your NC business taxes. Please note that these are general deadlines for calendar year filers; fiscal year filers will differ, and it's best to confirm with NCDOR/DES.

Deadline: Corporate income & franchise tax

Corporate income & franchise tax is due on the 15th day of the 4th month after the tax year ends (April 15 for calendar year). An extension is available for filing (Form CD-419), but not for payment.

Deadline: Partnership income tax

Partnership income tax is due on the 15th day of the 4th month after the tax year ends (April 15 for calendar year). An extension is available for filing (Form D-410P), but not for payment of nonresident withholding or entity-level tax if elected.

Deadline: Personal income tax (for owners)

The personal income tax deadline for owners is April 15th. An extension is available for filing (Form D-410), but not for payment.

Deadline: Sales & use tax

Your sales & use tax deadline is dependent upon your assigned frequency: Monthly (due 20th of next month), Quarterly (due last day of the month after quarter end - Apr 30, Jul 31, Oct 31, Jan 31), or Semi-Annually (due Jan 31 & Jul 31). NCDOR determines the frequency with which your business adheres to.

Deadline: Withholding tax

NCDOR determines your withholding tax payment frequency (Semi-weekly, Monthly, Quarterly). Returns (NC-5, NC-5Q) are generally due quarterly (Apr 30, Jul 31, Oct 31, Jan 31) or monthly if required. Annual Reconciliation (Form NC-3) is due by January 31 of the following year.

Deadline: Unemployment insurance (UI) tax

UI tax is due quarterly. Report and payment are due on the last day of the month following the quarter end (April 30, July 31, Oct 31, Jan 31).

Tax Incentives: Tax Breaks and Credits in North Carolina

A Look at North Carolina's business tax breaks

North Carolina offers several tax incentives that can reduce your business's tax burden, including Article 3J Tax Credits, Job Development Investment Grant (JDIG), Research and Development Tax Credit, Renewable Energy Tax Credits, and Historic Rehabilitation Credits.

Tax credits that help your business grow

Tax credits for North Carolina-based businesses directly reduce tax liability or provide cash back, impacting investment and job creation in the state. Your business may be eligible for the Work Opportunity Tax Credit, Film and Television Production Credit, and Historic Preservation Tax Credit. 

Industry-specific tax perks

Certain industries benefit from targeted incentives, including manufacturing (equipment exemptions and credits), technology/biotech (R&D credits and innovation incentives), hospitality/brewing (Historic rehabilitation credits), and renewable energy investment credits.

Expert CPAs with state-specific knowledge, like those at 1-800Accountant, can help identify and maximize available credits and incentives specific to your industry.

Common North Carolina Tax Forms for Businesses

Here are some of the primary forms your small business might need to operate in North Carolina, including NC-BR, Business Registration Application, is used to register for Sales & Use Tax, Withholding Tax, Income/Franchise Tax, and other NCDOR-administered taxes, D-400, NC Individual Income Tax Return, is used by sole proprietors, partners, LLC members, and S corp shareholders to report their share of business income and losses, CD-405, NC C corporation Tax Return, is used to file income and franchise taxes, and CD-401S, NC S corporation Tax Return, files income pass-through information and franchise taxes.

Where to Find More Help and Information

Useful websites, contacts, and support

Use the NCDOR's official site with tax updates via email subscription, the NC eBusiness Center, the NCDOR general inquiry contact (877-252-3052), the office of taxpayer advocate contact (919-715-2080), and the IRS North Carolina page. 

Penalties for Non-Compliance with North Carolina's Tax Requirements

Your business may face potential financial repercussions for non-compliance with North Carolina state tax requirements. Failure to comply, including filing late, paying late, underpaying, and negligence, results in penalties and interest. Interest will accrue on unpaid tax and penalties from the due date. Even after you've missed a filing deadline, timely compliance is crucial to avoid accumulating costs.

Different penalties you could face

Failing to meet your tax obligations could result in costly penalties, including Failure to File, Failure to Pay, Negligence, and Fraud Penalty.

Common Tax Mistakes in NC (and How to Avoid Them)

Common tax mistakes

North Carolina businesses frequently make these costly errors, failing to register, misclassifying workers, incorrectly administering sales tax, ignoring use tax, inadequate record-keeping, missing deadlines, and operating with a suboptimal entity structure.

Seeking professional advice on entity choice from services offering formation/restructuring guidance can prevent costly tax errors. 1-800Accountant's entity formation services can help you make the right choice.

Fixing common filing errors

While it's best to review your materials for errors prior to filing, businesses make common filing errors, including incorrect math, wrong forms, and missing information. If you've caught the error early, proactively file an amended return (D-400X) with the correct information. If common filing errors have plagued your business, establish an internal review process before filing or seek professional help to eliminate issues. 

Keeping up with tax law changes

Keeping up with tax law, rates, and form changes is essential. Examples of these changes in North Carolina include corporate phase-out, partnership election rules, remote seller rules, and ride-sharing taxes. Keep up with changes potentially impacting your business by visiting the NCDOR website, signing up for pertinent newsletters and business associations, and consulting with qualified tax professionals. 

Recent Tax Changes Affecting NC Businesses

Recent North Carolina tax updates

Significant changes include corporate income tax phase-out by 2030, partnership taxation election allowing businesses with trust partners to elect entity-level taxation, sales tax modernization impacting nexus rules, and a 1.5% rideshare excise tax.

Federal tax changes that impact NC businesses

Federal changes with North Carolina implications include the potential expiration of the 20% Small Business Deduction in 2025, impacting pass-through entities, and the potential sunset of TCJA provisions in 2025 that could impact various deductions and rates.

How to stay up-to-date

Stay up to date by consulting the NCDOR website or a tax professional for the most current information and strategic planning related to these changes in North Carolina tax laws and rules.

Conclusion: Taking Control of Your North Carolina Business Taxes

Navigating North Carolina's business tax landscape requires understanding your specific obligations, meeting deadlines, leveraging available incentives, and avoiding common pitfalls. The complexities of state taxes—from corporate and franchise to sales and payroll—underscore the value of expert guidance. Don't let tax complexities hinder your business growth. Take proactive steps to manage your North Carolina tax obligations effectively. Explore how 1-800Accountant's comprehensive services can provide the state-specific expertise and support your business needs to thrive financially.

Book a call with 1-800Accountant today for personalized tax solutions tailored to your North Carolina small business.