North Carolina Collects State Income Tax on Wages and Investment Income
Yes, North Carolina has a state income tax. The state taxes wages, salaries, investment income, and other forms of personal income. As of 2024, North Carolina's income tax rate is a flat 4.99 percent on all taxable income, meaning everyone pays the same percentage regardless of how much they earn.
This is different from the federal income tax you pay to the U.S. government. North Carolina's state tax is separate and in addition to federal taxes. If you work in North Carolina, live there, or earn income from a North Carolina source, you will likely owe state income tax on that money.
The state also taxes certain types of retirement income, including distributions from IRAs and 401(k) plans, though North Carolina offers some exemptions for military pensions and certain other retirement income. Capital gains—money you make when you sell stocks or property at a profit—are taxed at the same 4.99 percent rate as regular income.
Key Takeaways
- North Carolina's state income tax rate is a flat 4.99 percent on all taxable income, with no higher brackets for higher earners.
- You owe North Carolina income tax if you are a resident, work in the state, or earn income from a North Carolina source.
- The state taxes wages, investment income, retirement distributions, and capital gains, though some retirement income may be partially exempt.
- North Carolina income tax is separate from and in addition to federal income tax you owe to the U.S. government.
Who Has to Pay North Carolina Income Tax
You must pay North Carolina income tax if you are a resident of the state. The state considers you a resident if you live in North Carolina for more than six months of the year or if you maintain a permanent home there. If you are a resident, you owe tax on all income you earn, whether it comes from a North Carolina job or from sources outside the state.
If you do not live in North Carolina but work there, you still owe state income tax on the wages you earn from that North Carolina job. This applies even if you live in a neighboring state and cross the border for work. However, you do not owe North Carolina tax on income from sources outside the state if you are not a resident.
Part-time workers, self-employed people, and contractors all owe North Carolina income tax on their earnings if they meet the residency or income-source test. If you are unsure whether you are considered a resident for tax purposes, the North Carolina Department of Revenue can answer that question.
How North Carolina's Flat Tax Rate Works
North Carolina uses a flat tax system, which means everyone pays the same percentage of their income to the state, regardless of how much they earn. The current rate is 4.99 percent. This is simpler than a progressive system, where higher earners pay a higher percentage, but it means a person earning $30,000 a year and a person earning $300,000 a year both pay the same rate.
To calculate what you owe, you start with your taxable income—your total income minus deductions and exemptions. You then multiply that number by 4.99 percent. For example, if your taxable income is $40,000, you would owe $1,996 in North Carolina state income tax (before any credits that might reduce that amount).
The state offers a standard deduction that reduces your taxable income before you calculate the tax. For 2024, the standard deduction varies by filing status—single filers, married couples filing jointly, and heads of household all have different amounts. You can claim the standard deduction or itemize deductions if itemizing results in a larger deduction.
Types of Income That North Carolina Taxes
North Carolina taxes most forms of income. Wages and salaries from employment are taxed at the 4.99 percent rate. Self-employment income is also taxed, though self-employed people may owe federal self-employment tax in addition to state income tax. Interest income from savings accounts and bonds is taxed. Dividend income from stocks is taxed. Capital gains—the profit you make when you sell an investment or property—are taxed at the same 4.99 percent rate as ordinary income.
Retirement income receives some special treatment. Distributions from traditional IRAs and 401(k) plans are generally taxable, but North Carolina allows a deduction for some retirement income. Military pensions are exempt from state income tax. Some other types of retirement income may also may have access to for exemptions or deductions, depending on your age and the source of the income.
Income from rental property, royalties, and other business activities is also taxable. If you receive income from any source while living in or working in North Carolina, assume it is taxable unless you have a specific reason to believe it is exempt.
Filing and Payment important date
North Carolina income tax returns are due on the same date as federal income tax returns: April 15 of the year following the tax year. If April 15 falls on a weekend or holiday, the important date moves to the next business day. You can request an extension to file, which gives you until October 15, but any taxes you owe are still due by April 15—an extension only extends the time to file, not the time to pay.
If you have taxes withheld from your paycheck through your employer, you may not owe anything on April 15—you may even receive a refund if too much was withheld. If you are self-employed or have income that is not subject to withholding, you may need to make estimated tax payments four times a year to avoid penalties. The North Carolina Department of Revenue publishes the due dates for estimated payments.
You file North Carolina income tax using Form NC-40 (for residents) or Form NC-40NR (for nonresidents). You can file by mail or electronically through the state's online system. Many people use tax software that handles both federal and state returns at the same time.
Deductions and Credits Available in North Carolina
North Carolina offers several deductions that can lower your taxable income. The standard deduction is the most common—you subtract this amount from your income before calculating tax. You can also itemize deductions if you have significant expenses like mortgage interest, property taxes, or charitable donations, though you must itemize on your federal return to itemize on your state return.
The state also offers tax credits, which are different from deductions. A credit reduces the amount of tax you owe dollar-for-dollar, making it more valuable than a deduction. North Carolina offers credits for things like child and dependent care expenses, education expenses, and earned income (if you may have access to). Some credits are refundable, meaning you can receive money back even if you owe no tax; others are nonrefundable, meaning they can only reduce your tax to zero.
If you are over 65 or permanently disabled, you may may have access to for additional deductions. If you have military service or are a veteran, you may may have access to for exemptions on certain types of income. The North Carolina Department of Revenue website lists all available deductions and credits with income limits and may be able to access rules.
What Happens If You Do Not Pay
If you owe North Carolina income tax and do not pay by the important date, the state charges interest on the unpaid amount. The interest rate changes quarterly and is based on the federal rate. In addition to interest, the state may impose penalties for late payment or failure to file. A failure-to-pay penalty is typically 0.5 percent of the unpaid tax per month, up to 25 percent total. A failure-to-file penalty is higher if you do not file at all.
If you owe a significant amount and do not pay, the North Carolina Department of Revenue may place a tax lien on your property or garnish your wages. The state can also deny you a driver's license renewal or professional license renewal until the debt is resolved. If you cannot pay in full, you can contact the Department of Revenue to discuss a payment plan.
If you believe you made an error on your return or have a reason you should not owe the tax, you can file an amended return or request a hearing with the Department of Revenue. It is better to address the issue early than to wait for the state to contact you.
Frequently Asked Questions
Does North Carolina tax retirement income differently than wages?
North Carolina taxes most retirement income at the same 4.99 percent rate as wages, but the state allows a deduction for some retirement income. Military pensions are fully exempt. Distributions from IRAs and 401(k) plans are generally taxable, though you may may have access to for a deduction depending on your age and income. Contact the North Carolina Department of Revenue for details about your specific situation.
If I work in North Carolina but live in South Carolina, do I owe North Carolina tax?
Yes. North Carolina taxes income earned within the state, regardless of where you live. You would owe North Carolina tax on your wages from your North Carolina job. You may also owe South Carolina tax as a resident there. Some states offer credits to prevent double taxation, so check with both states about how to handle this situation.
Is Social Security taxed in North Carolina?
North Carolina does not tax Social Security benefits. However, if you have other income in addition to Social Security, that other income is taxable. Some retirement income may be partially exempt, so your total tax depends on all your income sources combined.
What if I move out of North Carolina during the year?
If you move out of North Carolina partway through the year, you are considered a resident for the months you lived there and a nonresident for the months after you left. You file a part-year resident return and owe North Carolina tax only on income earned while you were a resident. You may also owe tax to your new state on income earned after you moved.
Can I deduct federal income tax from my North Carolina state income tax?
No. North Carolina does not allow a deduction for federal income tax paid. However, you can deduct state and local taxes (including North Carolina income tax) on your federal return, up to a limit of $10,000 per year.