North Carolina Pass-Through Entity Tax

North Carolina has passed legislation to have eligible S Corporation’s and eligible Partnership’s to make an election to be taxed as a Pass-Through Entity.

The pass-through entity income will be taxed as the same tax rate as the individual tax rate, which is 5% – beginning January 1, 2022.

What does this mean?

  1. If you decide to make the election to have your S Corporation or Partnership taxed at the business level, then your business will pay the tax.
  2. You get to take the deduction on your Federal tax return – reducing your taxable income.
  3. The income will not be taxed on your NC personal tax return because you already paid the tax through the business.
  4. You should also be able to reduce your NC withholding from your paycheck or reduce your individual estimated NC tax payments because you have already paid the tax through the business.
  5. If you make the election to be taxed through the business you need to make quarterly estimated tax payments through the business.

In short – you are still paying the same amount of tax – 5%. If you pay the tax through the business it should reduce your Federal taxable income and therefore reduce your Federal tax liability.