North Carolina collects state income tax on wages, investments, and business income

Yes, North Carolina has a state income tax. The state taxes wages, salaries, interest, dividends, capital gains, and business income. Unlike some states that tax only certain types of income, North Carolina applies its income tax broadly to most forms of earnings.

The state income tax rate is a flat 4.99 percent as of 2024. This means everyone pays the same percentage regardless of how much they earn — there are no tax brackets that increase with income like the federal system uses. North Carolina changed to this flat rate in 2021; before that, rates ranged from 4.25 to 8.75 percent depending on income level.

If you work in North Carolina or live there, you will owe state income tax on money you earn. Your employer typically withholds this tax from your paycheck, similar to federal withholding. Self-employed people and those with investment income usually pay estimated taxes quarterly or settle the full amount when they file their annual return.

Key Takeaways

  • North Carolina's state income tax rate is 4.99 percent on all taxable income, applied equally to everyone.
  • The state taxes wages, self-employment income, interest, dividends, and capital gains.
  • If you work in North Carolina, your employer withholds state income tax from your paycheck unless you claim an exemption.
  • Retirees may be able to exclude some retirement income, including Social Security and certain pension payments, depending on their age and total income.
  • You file North Carolina state taxes using Form D-400 (Individual Income Tax Return) by April 15 each year, the same deadline as federal taxes.

Who has to file a North Carolina state tax return

You must file a North Carolina state return if you lived in the state for any part of the tax year and your income exceeds the filing threshold. For 2024, the threshold is $12,750 for single filers and $25,500 for married couples filing jointly. These amounts change yearly and depend on your filing status and age.

Even if your income is below the threshold, you may want to file anyway — especially if your employer withheld state taxes from your paychecks. Filing allows you to claim a refund of any overpayment. If you are self-employed, you must file if your net earnings from self-employment are $400 or more, regardless of the income threshold.

Part-year residents — people who moved to or from North Carolina during the year — must file if they meet the income threshold for the months they lived there. You report only the income earned while you were a resident.

What income North Carolina taxes and what it does not

North Carolina taxes most types of income: W-2 wages, 1099 self-employment income, interest from savings accounts and bonds, stock dividends, capital gains from selling investments, rental income, and income from partnerships or S-corporations. If money came in, the state generally wants to tax it.

The major exception is Social Security benefits. North Carolina does not tax Social Security income at any income level. This is one of the few states with this rule. Pension income and retirement account withdrawals (like 401(k) distributions) are taxable, but there are partial exclusions for certain types of retirement income if you meet age and income requirements.

Military pay, certain disability payments, and some types of government benefits are also exempt. Child support received is not taxable income. Interest on U.S. Treasury bonds is exempt from North Carolina tax but still subject to federal tax.

Retirement income exclusions in North Carolina

North Carolina offers a retirement income exclusion that allows people age 55 and older to exclude some retirement income from taxation. The exclusion applies to income from pensions, annuities, and distributions from retirement accounts like 401(k)s and IRAs — but not to wages from continued employment.

The amount you can exclude depends on your age and total income. People age 55 to 64 can exclude up to $35,000 of retirement income per year. People age 65 and older can exclude up to $35,000 per year as well, but the income limit is higher, making the exclusion more valuable for higher earners. You must report the income on your return and calculate the exclusion using the worksheet in the tax instructions.

This exclusion does not apply to Social Security, which is already fully exempt. It also does not reduce your federal tax liability — only your North Carolina state tax. If you receive both wages and retirement income, you can use the exclusion only on the retirement portion.

How withholding works and what to do if too much is taken

Your employer withholds North Carolina state income tax based on the W-4 form you complete when you start a job. The W-4 tells your employer how much to withhold based on your filing status, number of dependents, and other income. If you claim too many exemptions, too little is withheld and you owe money at tax time. If you claim too few, too much is withheld and you get a refund.

You can adjust your withholding at any time by submitting a new W-4 to your employer. This is useful if your life changes — marriage, divorce, a second job, or a spouse starting work — and your tax situation shifts. The state provides a withholding calculator on the Department of Revenue website to help you figure out the right amount.

If you have a second job, freelance income, or investment income, your employer's withholding may not cover your full tax bill. In that case, you can either increase withholding at your main job or make estimated tax payments to the state quarterly. Underpayment can result in penalties and interest, so it is better to adjust early if you know you will owe.

Self-employed people and quarterly estimated taxes

If you are self-employed or have significant income that is not subject to withholding, you must pay estimated taxes quarterly to North Carolina. Estimated taxes are payments you make four times a year (usually in April, June, September, and January) to cover both federal and state taxes on income that has no withholding.

You calculate your estimated tax by projecting your annual income and subtracting any credits you expect to claim, then dividing by four. The state provides Form NC-40-ES (Estimated Tax for Individuals) with payment vouchers and instructions. You can pay online through the Department of Revenue website, by mail, or by phone.

If you underpay estimated taxes, you may owe a penalty when you file your annual return, even if you ultimately paid enough total tax. The penalty is based on how much you underpaid and how late the payment was. Setting aside money each month and paying on time avoids this penalty.

Filing your North Carolina state tax return

You file your North Carolina state return using Form D-400 (Individual Income Tax Return) by April 15 each year — the same deadline as your federal return. You can file by mail, electronically through the state's online system, or through tax software that supports North Carolina returns.

You will need your federal return information, W-2s or 1099s showing your income, records of any deductions or credits you claim, and documentation of any estimated tax payments you made. If you are claiming the retirement income exclusion, you will need to calculate it using the worksheet provided with the instructions.

If you file electronically, you typically receive a refund within two to three weeks. Paper returns take longer — usually four to six weeks. You can check the status of your return on the Department of Revenue website using your Social Security number and the amount of your refund or payment.

Frequently Asked Questions

Do I have to pay North Carolina income tax if I work there but live in another state?

Yes. North Carolina taxes income earned within the state, regardless of where you live. If you work in North Carolina but live in South Carolina, Virginia, or another state, you owe North Carolina tax on your wages. You may also owe tax to your home state, but most states offer a credit for taxes paid to other states to avoid double taxation. File a part-year resident return with North Carolina and report the situation to your home state.

What happens if I do not file a North Carolina state return when I should have?

If you owe taxes and do not file, the state can assess a failure-to-file penalty of 5 percent per month (up to 25 percent total) plus interest on the unpaid amount. If you are owed a refund and do not file, you can claim it for up to three years from the original due date. The longer you wait, the more interest and penalties accumulate, so filing late is better than not filing at all.

Can I deduct federal income tax paid from my North Carolina state taxes?

No. North Carolina does not allow a deduction for federal income taxes paid. You calculate your state taxable income starting from your federal adjusted gross income, but federal tax payments do not reduce it. However, you can still claim the standard deduction or itemize deductions on your state return, similar to your federal return.

Is there a state earned income tax credit in North Carolina?

North Carolina does not have its own earned income tax credit. However, if you are a low-income worker, you may be able to claim the federal Earned Income Tax Credit (EITC) on your federal return, which can result in a refund. The state does offer other credits for specific situations, such as the child and dependent care credit and the education credit, which reduce your North Carolina tax liability.

What if I moved to North Carolina mid-year?

You file as a part-year resident and report only the income you earned while living in North Carolina. You will need to determine your residency date — usually the date you moved into the state with the intent to stay. Report your income for the months you were a resident on Form D-400 and check the part-year resident box. Your withholding and estimated tax obligations apply only to the income earned during your time as a resident.