Key Takeaways

  • LLCs in NC are taxed as pass-through entities by default but can elect corporate taxation.
  • North Carolina requires LLCs to pay a franchise tax if they elect to be taxed as a corporation.
  • LLCs with employees must register for withholding tax and state unemployment tax.
  • Sales tax applies to certain goods and services, with specific filing requirements.
  • Filing and tax compliance for an LLC in NC depend on factors like revenue, structure, and industry.
  • LLCs operating in multiple states may face multi-state tax filing requirements.
  • Certain tax deductions and exemptions may apply, reducing an LLC’s taxable income.

LLC taxes in NC are the taxes that a limited liability company must pay to the state of North Carolina. At the federal level, an LLC is a pass-through entity, which allows it to avoid the double taxation that affects corporations. An LLC also has the flexibility to be treated as a partnership, corporation, sole proprietor, or S corp by the IRS.

Pass-Through Taxation

With this tax structure, the LLC's profits and losses are reported on each owner's individual income tax return. The LLC itself does not pay corporate income tax. Although some states require the LLC to pay income tax at the corporate level, this is not the case in NC.

To choose corporate tax treatment for your LLC, file IRS Form 2553. This requires the LLC to file a separate federal income tax return each year. Corporations are also taxed by North Carolina at a rate of 5 percent of annual income and must pay a franchise tax each year. File Form CD-405 with the Department of Revenue.

North Carolina Franchise Tax for LLCs

LLCs in North Carolina that choose to be taxed as a C Corporation or S Corporation must pay an annual franchise tax. This tax is calculated based on the greater of:

  1. Net worth in NC
  2. Investment in property or real estate in NC
  3. Minimum franchise tax of $200

The franchise tax return must be filed using Form CD-405 with the NC Department of Revenue. Failure to file or underpayment can result in penalties.

Employer Taxes

An LLC that has employees must pay employer taxes, some of which are owed to the IRS and some of which are to the state. When you start an LLC, you must register for a free employer identification number (EIN) with the federal tax bureau.

At the state level, employee income tax must be withheld from their checks and remitted to the NC Department of Revenue. File Form NC-BR to register as an employer, then use Form NC-5 to file withholding taxes every month or quarter as required. Tax withholding is reconciled annually by filing Form NC-3.

You must register with the Division of Employment Security to pay state unemployment insurance (UI) taxes. This can be done online or on paper with Form NCUI 604. Wages must be reported and taxes paid quarterly using Form NCUI 101.

Self-Employment Tax Obligations for LLC Members

Since LLCs in NC are generally taxed as pass-through entities, members must pay self-employment tax on their earnings. This includes:

  • Social Security Tax (12.4%)
  • Medicare Tax (2.9%)

For high earners, an additional 0.9% Medicare surtax may apply. These taxes are reported on Schedule SE (Form 1040) and must be paid quarterly to the IRS if estimated taxes exceed $1,000.

Sales Tax

If you're selling products to North Carolina customers, you must register with the Department of Revenue to collect and remit sales tax. This can be done online or on paper using Form NC-BR, after which you will receive a Certificate of Registration. Sales tax must be paid either quarterly or monthly.

Some products that are subject to state sales tax include the following:

  • Furniture.
  • Appliances.
  • Vehicles.
  • Physical items.
  • Digital items, including downloaded movies and albums.

Sales tax is not charged on gas, groceries, and prescription drugs. Some services are also taxable; the DOR offers a complete list of these on its website.

If you sell any items that are subject to sales tax, you need to register for a seller's permit by providing your Employer Identification Number (EIN), NC Secretary of State number, business name and contact information, names and contact information for responsible parties, and information about goods for purchase. Resold items require a reseller's permit but are not subject to sales tax.

To prevent your business from audits and fines, make sure you correctly calculate the sales tax rate on each item you sell, considering both store sales and in-state and out-of-state sales.

Store sales are based on your business location. For example, if your store is in Durham, each item is subject to 7 percent sales tax, found by combining Durham's city rate of 2.25 percent with the state rate of 4.75 percent.

Online sales and other long-distance sales are taxed based on the buyer's address, accounting for city, county, and state sales taxes. For example, if your store is based in Asheville and you sell an item to a customer in Cary, the sales tax rate would be based on the Cary rates.

Sales to customers outside the state are only subject to sales tax in locations where your business has a nexus. A nexus is a physical location and can consist of:

  • A drop-shipping location.
  • A marketing affiliate.
  • A remote employee.
  • An office, store, or warehouse.
  • A booth at an event or festival.

If your business collects more than $100 in sales tax on a monthly basis, you must file monthly sales tax returns. Other businesses can file quarterly if approved by the secretary of state. You must file even if you collected no sales tax in a given period.

Sales Tax Exemptions and Industry-Specific Taxes

While many products and services are taxable in North Carolina, certain exemptions apply, including:

  • Raw materials used in manufacturing
  • Certain farm supplies
  • Sales to non-profits with exemption certificates

Additionally, some industries are subject to specialized taxes, such as:

  • Lodging tax for short-term rental businesses
  • Prepared food and beverage tax for restaurants
  • Motor vehicle rental tax

It is essential for LLCs to verify their industry-specific tax obligations with the NC Department of Revenue.

Multi-State Sales and Tax Nexus Considerations

If an LLC sells products online to customers in other states, it may need to collect and remit out-of-state sales tax if it has a nexus in that state. Nexus can be created by:

  • Having a physical office, warehouse, or employees in another state
  • Crossing a state's economic threshold for sales volume
  • Using third-party fulfillment services like Amazon FBA

North Carolina follows the Wayfair decision guidelines, meaning even out-of-state LLCs selling to NC residents may have to collect sales tax if they meet economic nexus thresholds.

Frequently Asked Questions

1. Does North Carolina impose a state income tax on LLCs?

     No, NC does not tax LLCs at the entity level unless they elect corporate taxation. Instead, profits pass through to the owners’ individual tax returns.

2. How do LLCs file annual reports in North Carolina?

     LLCs must file an Annual Report with the NC Secretary of State and pay a $200 fee. This can be done online by April 15th each year.

3. What is the penalty for late tax filings for NC LLCs?

     Failure to file taxes or pay on time can result in a 5% penalty per month, up to 25% of the unpaid amount, plus interest.

4. Can an LLC deduct business expenses from taxable income?

     Yes. Eligible deductions include rent, utilities, payroll, business insurance, travel expenses, and advertising costs.

5. How do I know if my LLC has a tax nexus in another state?

      A tax nexus is triggered if your LLC has employees, warehouses, or significant sales in another state. Check state tax laws where you do business.

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