Operational Gaze:
How to Run Payroll in North Carolina?

April 11th 2024

Are you navigating the complexities of running payroll in North Carolina? This comprehensive guide is tailored to demystify the process for employers and employees alike. Focused on the latest information, it covers state-specific tax obligations, wage laws, compliance, and record-keeping. With clarity and precision, this guide ensures you manage payroll duties in North Carolina, maintaining legal compliance while fostering a seamless payroll experience.

This Article Covers

Laws That Affect Payroll Procedures in North Carolina
Worker Classifications in North Carolina
Payroll Forms and Relevant Bodies in North Carolina
Applicable Taxes in North Carolina
Key Pay Elements That Impact Payroll in North Carolina
Step-by-Step Guide to Payroll in North Carolina

Laws That Affect Payroll Procedures in North Carolina

North Carolina Laws

  • North Carolina Wage and Hour Act (N.C. Gen. Stat. § 95-25.1 et seq.): This Act mandates employers pay the higher of federal or state minimum wages and time-and-a-half for overtime beyond 40 hours weekly. It also requires regular and timely payments. Child labor provisions align with federal standards, setting age limits and work-hour restrictions for minors.
  • North Carolina Wage Deduction Laws (N.C. Gen. Stat. § 95-25.8): North Carolina permits payroll deductions only if mandated by law, consented to in writing by the employee, and are for the employee’s benefit. This includes deductions for taxes, garnishments, insurance premiums, union dues, savings plans, and charitable donations. Deductions bringing wages below minimum wage are prohibited in North Carolina, ensuring fair compensation practices.
  • North Carolina Employment Security Law (N.C. Gen. Stat. § 96-1 et seq.): This law outlines unemployment insurance, requiring employer contributions based on payroll and claim history. It defines unemployment benefit eligibility, payment amounts, and durations. Employers must report employment data, adhere to claim procedures, and comply with fund contribution requirements, offering a safety net for workers who lose jobs through no fault.
  • North Carolina Workers’ Compensation Act (N.C. Gen. Stat. § 97-1 et seq.): Employers must provide workers’ compensation insurance, covering medical expenses, rehabilitation, and wage replacement for job-related injuries. Reporting work-related injuries and adhering to claim procedures is mandatory. Non-compliance can lead to fines, legal repercussions, and loss of operating licenses, emphasizing safety and employee protection.
  • North Carolina Health Care Continuation Coverage Law (N.C. Gen. Stat. § 58-50-110): This statute requires employers to offer continued health care coverage post-employment due to unexpected events like job termination, hour reduction, or family status changes. Coverage terms may differ from federal Consolidated Omnibus Budget Reconciliation Act (COBRA) law, emphasizing healthcare accessibility and affordability for former employees during transitional periods, including those facing economic hardships.
  • North Carolina New Hire Reporting Law (N.C. Gen. Stat. § 110-129): Employers must report new and rehired employees within 20 days. Reported details include employee and employer identification information. This facilitates child support enforcement and helps in locating non-custodial parents, ensuring their compliance with child support obligations.
  • North Carolina Final Paycheck Law (N.C. Gen. Stat. § 95-25.7): Employers must issue final paychecks by the next payday upon termination. This includes all due wages, accrued leave, and other compensations. Delayed payments may incur penalties, including continued wage payment until settlement, ensuring timely compensation for terminated employees.

Federal Laws

As compared to state-mandated laws, federal laws provide a nationwide framework for payroll procedures that must be adhered to by employers in North Carolina and across the USA.

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that sets standards for minimum wage, overtime pay, recordkeeping, and youth employment. As of the last update, the federal minimum wage is $7.25 per hour, although employers in North Carolina must comply if state minimum wage laws dictate a higher amount. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate for hours worked beyond 40 in a workweek.
  • Family and Medical Leave Act (FMLA): The FMLA sets out provisions for leave entitlement. Eligible employees have the right to take up to 12 weeks of unpaid leave for events such as childbirth, adoption, or the care of a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA): The FICA requires that employers deduct Social Security and Medicare taxes from paychecks and also make a matching contribution. As of the current information available, the Social Security tax rate was 6.2% for the employer and 6.2% for the employee on earnings up to the applicable taxable maximum amount. Medicare tax was 1.45% each for both employer and employee, with an additional 0.9% for high earners.
  • Federal Unemployment Tax Act (FUTA): FUTA imposes a federal payroll tax on employers to help fund state unemployment agencies. Employers pay this tax annually, and it is calculated at 6% of the first $7,000 paid to each employee as wages during the fiscal year. Significantly, employers can receive a credit of up to 5.4% for making timely and full payments of state unemployment taxes, effectively reducing the FUTA rate to a more manageable 0.6%.

HR Laws

  • North Carolina Equal Pay Act (N.C. Gen. Stat. § 95-25.1 et seq.): This Act prohibits wage discrimination based on sex, ensuring equal pay for comparable work regardless of gender. Pay disparities are acceptable only when based on seniority, merit, productivity, experience, or other non-gender-related factors. The Act reinforces fair compensation practices, promoting gender equality in the workplace and fostering a diverse, inclusive work environment.
  • North Carolina Employment Discrimination Laws (N.C. Gen. Stat. § 143-422.2): This law prohibits employment discrimination based on race, religion, color, national origin, age, sex, or disability in North Carolina. It applies to employers with 15 or more employees. The law mandates equal treatment in hiring, firing, promotion, compensation, professional training, and other terms of employment, ensuring a workplace free from discriminatory practices.
  • North Carolina Family Illness Leave (N.C. Gen. Stat. § 95-28.3): This provision allows eligible employees up to four weeks of unpaid leave per year for the care of a child, spouse, or parent with a serious health condition. It applies to employers with 50 or more employees, complementing the federal Family and Medical Leave Act (FMLA) but with its criteria.
  • North Carolina Occupational Safety and Health Act (OSHANC) (N.C. Gen. Stat. § 95-126): The North Carolina Occupational Safety and Health Act (OSHANC) mirrors federal Occupational Safety and Health Administration (OSHA) standards but includes state-specific requirements. It obligates employers to provide a safe workplace, free from hazards. This law also covers a broad range of safety and health standards, including reporting and recordkeeping of workplace injuries and illnesses, emphasizing the importance of workplace safety.
  • North Carolina Pregnancy Accommodation Law (N.C. Gen. Stat. § 95-25.1 et seq.): Under this state-mandated law, employers must provide accommodations for pregnancy, childbirth, and related medical conditions unless it causes undue hardship. This includes more frequent or longer breaks, temporary transfer to a less strenuous position, or modified work schedules, ensuring pregnant employees’ health and well-being are supported at work.
  • North Carolina Retaliatory Employment Discrimination Act (REDA) (N.C. Gen. Stat. § 95-240 et seq.): Retaliatory Employment Discrimination Act (REDA) protects employees who engage in protected activities, such as filing safety and health complaints or workers’ compensation claims, from retaliation. It prohibits employers from discharging, suspending, demoting, or discriminating against employees in terms and conditions of employment. This law ensures employees can exercise their rights without fear of reprisal.
  • North Carolina Human Trafficking Notice Posting Requirement (N.C. Gen. Stat. § 14-432.4): This law requires certain businesses, including hospitality establishments, to post a clear and conspicuous notice regarding human trafficking. The notice must include information about assistance, protection for victims, and legal rights, including contact information for national and local anti-trafficking hotlines. This law aims to raise awareness, educate the public, and provide essential resources for human trafficking prevention and victim support.

Worker Classifications in North Carolina

In North Carolina, the classification of workers as either employees or independent contractors is a critical legal determination that affects rights, responsibilities, and benefits for both parties involved. This distinction is based on the degree of control an employer has over the worker.

Employees and Independent Contractors

Employees are workers under an employer’s control, receiving benefits like minimum wage, overtime, and unemployment insurance. Employers withhold taxes for them. Conversely, independent contractors operate autonomously, without such benefits or tax withholdings, handling their own taxes and often using personal tools. The distinction hinges on the degree of control an employer has over the worker’s schedule, methods, and work conditions.

Right to Control

The concept of “Right to Control” in North Carolina is fundamental in determining whether a worker is classified as an employee or an independent contractor. This is critical because it dictates legal responsibilities, tax implications, and eligibility for employment benefits.

At the core of the “Right to Control” concept is the extent of control an employer has over a worker’s activities. If an employer dictates what tasks are done and how they are executed, the worker is likely considered an employee. In contrast, if a worker has significant independence in how they perform their duties, they are typically viewed as an independent contractor.

Several factors contribute to this assessment. The level of training provided by the employer is telling; employees receive guidance on how to perform tasks, while independent contractors use their own methods. The scheduling of hours also plays a role; employees usually work set hours determined by the employer, whereas independent contractors often set their own schedules.

Financial aspects are another critical element. Employees typically receive a steady wage and have taxes withheld by their employer, while independent contractors handle their own tax payments and may have more opportunity for profit or loss. The duration of the work relationship can also be indicative; a long-term, ongoing arrangement suggests an employee status, whereas independent contractors usually work on a temporary or project basis.

Another telling sign is the provision of tools and equipment. Employees are generally provided with the necessary tools, whereas independent contractors use their own resources.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in North Carolina and your rights as an hourly employee in North Carolina.

Payroll Forms and Relevant Bodies in North Carolina

North Carolina Payroll Forms

  • NC-4 Form (Employee’s Withholding Allowance Certificate): This form is crucial for determining the amount of state income tax to withhold from an employee’s wages. Employees should complete it to indicate withholding allowances, which are based on individual situations such as marital status, number of dependents, and other factors that influence their tax liability. It ensures accurate withholding, aligning with each employee’s unique tax situation.
  • NC-4 EZ Form (Employee’s Withholding Allowance Certificate): This is a streamlined version of the NC-4 Form, designed for employees who intend to claim the standard deduction in North Carolina and no tax credits, or only the credit for children. It simplifies the process for those with straightforward tax situations, ensuring allowances without complex calculations.
  • NC-3 Form (Annual Withholding Reconciliation): Employers are required to use this form to report the total state income tax withheld from all employees’ wages throughout the year. It serves to reconcile the taxes withheld with the total amounts reported on each employee’s W-2 forms, ensuring accuracy in reporting and compliance with tax regulations.
  • NC-5 Form (Withholding Return): Employers must file this form to accurately report and remit state income taxes they have withheld from employees’ wages. Typically filed on a quarterly basis, the frequency may increase for larger employers with more employees. 
  • NCUI 101 (Employer’s Quarterly Tax and Wage Report): This form is essential for employers in North Carolina for accurately reporting employee wages and calculating the employer’s contribution to unemployment insurance. Filing this quarterly tax and wage report is mandatory for compliance with state unemployment tax laws, playing a key role in funding North Carolina’s unemployment insurance program and maintaining eligibility for benefits.
  • D-400TC (Individual Income Tax Return – Tax Credits): This form is important for employers to be aware of as it includes various tax credits that can influence state withholding amounts. These credits, those for childcare, can significantly affect an employee’s tax liability, thereby impacting the appropriate level of state income tax withholding from their wages.
  • Form NCUI 604 (Employer Status Report): New employers in North Carolina use this form to register with the state for unemployment insurance. It is used to determine whether a business is liable for state unemployment taxes. Finally, compliance with this requirement is crucial for legal operation and contributing to the state’s unemployment insurance system.

Federal Payroll Forms

Alongside North Carolina-specific documentation, federal payroll forms are equally important:

  • Form W-4 (Employee’s Withholding Certificate): The Form W-4, or Employee’s Withholding Certificate, is a federal document that employees across the United States fill out to inform employers about how much federal income tax should be withheld from the wages. The Form W-4 takes into account various factors like marital status, dependents, and additional income to tailor the withholding to the employee’s unique tax situation. With periodic updates, especially after major life events or changes in financial circumstances, the W-4 ensures that employees neither overpay nor underpay the federal income taxes throughout the year.
  • Form W-2 (Wage and Tax Statement): Employers use the Form W-2, known as the Wage and Tax Statement, to report the annual wages paid to each of their employees and the specific amount of taxes withheld. This federal form, issued to every employee before the end of January each year, is vital for individuals when preparing their personal income tax returns. For the employee, it offers a clear summary of their earnings and tax withholdings, while for the IRS, it serves as a record of the individual’s employment-related earnings and tax obligations.
  • Form W-3 (Transmittal of Wage and Tax Statements): The Form W-3 is basically a document used by employers to submit the total of all W-2 forms to the Social Security Administration. This form summarizes the total earnings, Social Security wages, Medicare wages, and withholding for all employees for the year. The W-3, which must accompany the W-2 forms, is an essential tool for the SSA to verify an employee’s income and tax information.
  • Form 940 (Federal Unemployment Tax Act Return): Form 940 is a federal form that employers utilize to report annual Federal Unemployment Tax Act (FUTA) tax. This tax provides funds for state unemployment agencies and supports unemployed workers. The form calculates the employer’s federal unemployment tax liability, considering any state unemployment tax they’ve already paid. By accurately completing and submitting this form, employers contribute to a system that offers financial support to individuals during periods of joblessness.
  • Form 941 (Employer’s Quarterly Federal Tax Return): Used by employers, Form 941, titled the Employer’s Quarterly Federal Tax Return, reports the wages they’ve paid and the corresponding taxes withheld every quarter. It captures details related to federal income tax, Social Security, and Medicare withholdings. By submitting this form quarterly, employers maintain a consistent record with the IRS, ensuring they meet tax obligations as required.
  • Form 944 (Employer’s Annual Federal Tax Return): Designed for smaller employers, the Form 944 allows them to report income and FICA taxes withheld from employees’ paychecks just once a year instead of quarterly. This form simplifies the reporting process for eligible small businesses by reducing the number of times they must submit tax withholding information, easing the administrative burden and allowing them to focus on running their business.
  • Form 1099 (Miscellaneous Income): The 1099 forms are a series of documents the IRS uses to account for various types of non-employment income. There are many different types of 1099 forms, but one of the most common is the 1099-MISC, which is given to independent contractors or freelancers to report payments made to them for services rendered in the course of trade or business. This form is critical for the IRS to track income that might otherwise go unreported and for contractors to accurately report their income and calculate the taxes.

Federal and North Carolina Payroll/Tax Bodies

  • North Carolina Department of Revenue (NCDOR): The NCDOR administers tax laws and collects taxes due to the state. It’s responsible for processing state tax returns, issuing refunds, and overseeing state tax compliance, including withholding taxes from employee wages.
  • North Carolina Division of Employment Security (DES): The DES in North Carolina carefully handles unemployment insurance, including employer contributions and claims processing. It ensures employers comply with unemployment tax obligations, offers assistance to jobless workers, and maintains the integrity of the unemployment insurance program.
  • North Carolina Industrial Commission (NCIC): The NCIC administers the Workers’ Compensation Act. It ensures employers provide appropriate workers’ compensation insurance, processes injury claims, and resolves disputes between individuals regarding workplace injuries.
  • North Carolina Department of Labor (NCDOL): NCDOL enforces labor laws related to wage and hour standards, workplace safety, and youth employment. It ensures employers adhere to minimum wage laws, overtime, and other labor standards, protecting workers’ rights.
  • North Carolina State Health Plan (NCSHP): The NCSHP body administers health insurance coverage for state employees. It provides comprehensive health care benefits and works towards cost-effective healthcare solutions for state employees and retirees.
  • Internal Revenue Service (IRS): The IRS stands as the United States’ primary federal tax authority. Its mandate covers the vast spectrum of federal tax matters, inclusive of payroll taxes. By providing regulatory guidelines, tax codes, and essential resources, the IRS facilitates nationwide tax compliance. It is important to note that both employers and employees rely on the IRS’s directives to understand their federal tax obligations and ensure adherence.
  • U.S. Department of Labor (DOL): Believe it or not, the U.S. DOL has a broad role, impacting various facets of employment across the nation. Among its chief responsibilities are the formulation and enforcement of wage and hour standards. The DOL ensures fair labor practices, safeguards employee rights, and fosters a balanced work environment. This guidance assists employers in aligning the operations with federal employment norms and standards.
  • Social Security Administration (SSA): The Social Security Administration (SSA) runs programs for retirement, disability, survivor benefits, and family support. They also assist people in signing up for Medicare. The SSA is also the government body responsible for issuing Social Security Numbers— crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. DOL, whose main job is to ensure employers follow labor standards to protect workers’ rights. The WHD enforces laws like the Fair Labor Standards Act (FLSA), which covers things like minimum wage, overtime pay, recordkeeping, and child labor rules. It also enforces other laws like the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the FMLA.

Applicable Taxes in North Carolina

State Taxes

  • North Carolina Personal Income Tax: This personal income tax is applied to the taxable income and features a graduated rate structure, where the rate increases as income rises. It accommodates standard deductions and personal exemptions, aiming to fairly tax residents based on their financial capability. The progressive nature of this tax reflects an effort to balance revenue needs with the economic realities of different income groups in the state.
  • North Carolina Corporate Income Tax: Levied on businesses, this tax is assessed on a company’s taxable income. Notably, North Carolina has a flat corporate tax rate, recognized as one of the lowest in the Southeast. This flat rate structure simplifies tax calculations for businesses and is part of the state’s comprehensive strategy to create a favorable business environment, attracting and retaining diverse corporations and fostering economic growth.
  • North Carolina Sales and Use Tax: This tax encompasses most retail sales of goods and certain services within the state, including digital products. It consists of a state-imposed rate supplemented by additional local rates, which vary across counties and municipalities. This tax structure aims to generate revenue while accommodating the diverse economic conditions of different localities, ensuring a balanced approach to taxation across the state’s various regions.
  • North Carolina Unemployment Insurance Tax: This employer-funded tax supports the state’s unemployment insurance program. The tax rate is variable, influenced by factors such as the employer’s specific industry, company size, and history of unemployment claims. This system is designed to provide a financial safety net for workers who are unemployed, ensuring stability and essential support for individuals during challenging periods of job transition.
  • North Carolina Property Tax: Imposed on both real and personal property, this tax is based on the assessed value of the property. Property tax rates differ among localities and contribute to funding essential local services such as schools, infrastructure maintenance, and public safety initiatives. This localized approach allows for tailored revenue generation that directly benefits the community services most relevant to each area, reflecting specific local needs and priorities.
  • North Carolina Franchise Tax: Targeted specifically at corporations, this tax is for the privilege of conducting business in the state. Calculated based on the greater of the corporation’s net worth, 55% of the appraised property value, or actual state investment, this tax reflects North Carolina’s approach to balancing the need for revenue with the desire to maintain a business-friendly environment, encouraging economic growth and corporate investment.

Federal Taxes

  • Federal Income Tax: Employers are obligated to withhold federal income tax from employees’ paychecks. The amount withheld is determined by the information the employee furnishes on Form W-4 and is calculated according to the IRS-provided tax tables. This tax is progressive, with the applicable rate escalating as the employee’s taxable income increases.
  • Social Security and Medicare Taxes (FICA): Both employers and employees are mandated to contribute to Social Security and Medicare through the Federal Insurance Contributions Act (FICA) tax. Employers are responsible for accurately withholding the specified amount from their employees’ wages and also for contributing a corresponding matching amount.
  • Federal Unemployment Tax Act (FUTA): Employers pay this federal tax separately from other taxes, and it is not withheld from employees’ wages. FUTA, working in conjunction with the state unemployment system, provides critical funds for workers who are unemployed.

Key Pay Elements That Impact Payroll in North Carolina

Minimum Wage

In North Carolina, the minimum wage is firmly set at $7.25 per hour, aligning with the federal minimum wage standard. Employers are required to pay this minimum rate to non-tipped employees. Tipped employees can be paid a lower base wage, provided the tips ensure they earn at least the standard minimum wage when combined with the foundational (base) pay.

Overtime

Overtime regulations in North Carolina mandate that employees are paid one and a half times their regular rate for hours worked beyond 40 in a workweek. This applies to most employees, except for certain exempt positions like administrative, executive, and professional roles. Employers must carefully track hours to ensure compliance with these overtime requirements.

Pay Stub Laws

North Carolina employers must provide employees with a statement each pay period detailing deductions (taxes and insurance). While electronic pay stubs are permissible, employers must ensure employees have a means to access them. These pay stubs are crucial for transparency in wage calculations and deductions, aiding in financial record-keeping for both parties.

Workers’ Compensation Insurance

Employers in North Carolina are required to provide workers’ compensation insurance if they have three or more employees. This covers medical costs and wage replacement for employees who suffer job-related injuries or illnesses. Compliance with this requirement is essential to protect both employees and employers from the financial implications of workplace accidents.

Garnishments and Deductions

Employers may be required to withhold a portion of an employee’s wages for garnishments due to debts like child support, student loans, or tax levies. Other voluntary deductions, such as for health insurance, retirement plans, or charitable contributions, must be agreed upon in writing. Accurate processing of these deductions is vital for legal compliance and maintaining trust.

Final Paycheck

Upon termination or resignation, employees in North Carolina are entitled to receive their final paycheck on the next regular payday, without any unnecessary delay. This includes all earned wages and accrued leave, if applicable, according to company policy. Employers failing to comply with this requirement may face legal consequences, emphasizing the need for prompt and accurate final wage payments to uphold labor laws and maintain workplace fairness.

Step-by-Step Guide to Payroll in North Carolina

  • Step 1: Obtain an Employer Identification Number (EIN): First, secure an EIN from the IRS, which is essential for reporting taxes and other documents to the IRS and North Carolina agencies. This unique number identifies your business and is required for all your payroll and tax filings, ensuring your business is properly registered and recognized for tax purposes.
  • Step 2: Register with North Carolina Agencies: Register your business with the North Carolina Department of Revenue (NCDOR) for state tax purposes and with the North Carolina Division of Employment Security (NCDES) for unemployment insurance. This step is crucial for state tax compliance and for contributing to the state’s unemployment insurance fund.
  • Step 3: Set up Your Payroll: Establish your payroll system, deciding how and when employees will be paid, including frequency and method. Choose between manual payroll or software solutions for efficiency and accuracy. Ensure compliance with North Carolina’s minimum wage, overtime, and pay stub laws. Accurate payroll setup is vital for smooth operations, legal compliance, and maintaining employee trust in your business practices.
  • Step 4: Collect Employee Tax Information: Gather completed W-4 and NC-4 forms from your employees. These forms are crucial as they determine federal and state tax withholding levels, respectively. Accurate collection and processing of this information is essential for ensuring correct tax withholding, maintaining compliance with various tax laws, and avoiding potential under or over-withholding issues that could affect both the employer and employees.
  • Step 5: Document and Calculate Payroll: Carefully document all hours worked by employees and accurately calculate gross pay, taking into account overtime and any bonuses or commissions. Then, deduct appropriate federal, state taxes, and other withholdings. Precision in this step is absolutely critical to ensure that employees receive the correct net pay and that all necessary deductions are made accurately, complying with legal standards and obligations.
  • Step 6: Pay Employees and File Payroll Taxes: Responsibly issue employee payments via check, direct deposit, or other agreed-upon methods. Simultaneously, payroll taxes must be accurately filed with both the IRS and the North Carolina Department of Revenue (NCDOR). Timely and accurate payment are crucial to maintain strict compliance with tax regulations, avoid potential penalties, and ensure smooth financial operations within your business.
  • Step 7: Report New Hires: Report new hires to the North Carolina Directory of New Hires. This step is essential for child support enforcement and for maintaining state records. Timely reporting of new hires helps in the management of employment records and legal compliance.
  • Step 8: Maintain Records and Prepare for Year-End: Keep detailed payroll records for each employee, including hours worked, pay rate, deductions, and leave. Prepare for year-end reporting, including W-2s and other tax documents. Proper record-keeping and preparation for year-end reporting are critical for audit and compliance with state and federal regulations.

Final Thoughts

Managing payroll in North Carolina can be a particularly challenging task. Employees must ensure they adhere to North Carolina’s strict payroll regulations. To simplify the often complex process of managing payroll, consider exploring our comprehensive list of the top 6 applications tailored to streamline payroll responsibilities in the USA. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the USA.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.