Yes, North Carolina has a state income tax, and it applies to most forms of earned and unearned income

North Carolina taxes ordinary income — wages, salaries, self-employment earnings, interest, and dividends — at a flat rate. As of 2024, that rate is 4.99 percent. This is separate from federal income tax. You owe both: federal tax to the IRS, and state tax to the North Carolina Department of Revenue.

The state also taxes capital gains (profit from selling investments or property) at the same 4.99 percent rate, though certain long-term capital gains have received preferential treatment in recent years — the rules have changed and may change again. North Carolina does not have a separate sales tax on groceries, but it does tax most other purchases at 4.75 percent statewide, plus local add-ons that vary by county.

If you live in North Carolina or work there, you file a state return in addition to your federal return. If you moved to or from North Carolina during the year, you may owe tax to two states, and you may be able to claim a credit to avoid paying the same income twice.

Key Takeaways

  • North Carolina taxes ordinary income at a flat 4.99 percent rate, separate from federal income tax.
  • You must file a state return if you lived in North Carolina for any part of the tax year and earned income above the filing threshold.
  • Capital gains are taxed at the same 4.99 percent rate, though long-term gains have received preferential treatment that has changed in recent years.
  • If you worked in North Carolina but lived elsewhere, or vice versa, you may owe tax to both states and may be able to claim a credit for taxes paid to the other state.

Who Must File a North Carolina State Return

You must file a North Carolina return if you lived in the state for any part of the tax year and your income exceeded the filing threshold. The threshold depends on your filing status and age. For 2023, a single person under 65 with at least $12,750 in gross income must file. A married couple filing jointly with at least $24,200 must file. These thresholds change each year.

If you are a part-year resident — you moved to or from North Carolina during the year — you file a part-year resident return. You report only the income you earned while you lived in North Carolina. If you worked in North Carolina but lived in another state, you may owe North Carolina tax on that income even though you are not a resident.

How North Carolina Income Tax Differs From Federal Tax

North Carolina uses a flat tax rate of 4.99 percent on all taxable income. The federal government uses a progressive system with multiple tax brackets — your rate increases as your income rises. This means a North Carolina resident with $100,000 in taxable income pays 4.99 percent to the state, regardless of how much they earn. The federal rate on that same income depends on which bracket it falls into.

North Carolina also has different deductions and credits than the federal system. For example, North Carolina allows you to deduct federal income tax paid, which reduces your state taxable income. The federal government does not allow you to deduct state income tax on your federal return (though you can claim it as an itemized deduction if you itemize). Standard deduction amounts also differ: North Carolina's standard deduction is lower than the federal standard deduction.

Both systems tax capital gains, but the treatment has diverged in recent years. North Carolina has experimented with preferential rates for long-term capital gains, meaning gains held for more than one year may be taxed at a lower rate than ordinary income. These rules have changed and may change again, so check the current year's rules before filing.

Self-Employment Income and North Carolina State Tax

If you are self-employed, you owe North Carolina income tax on your net self-employment income at the 4.99 percent rate. You also owe federal self-employment tax (Social Security and Medicare), which is separate. North Carolina does not have a separate self-employment tax.

When you file your federal return, you calculate your self-employment tax on Schedule SE and report it on your 1040. When you file your North Carolina return (Form D-400), you report your net self-employment income on the same line you would report wages. The state taxes it at the flat 4.99 percent rate. You may be able to deduct half of your federal self-employment tax on your North Carolina return, similar to the federal deduction.

What Happens if You Moved to or From North Carolina

If you moved during the tax year, you are a part-year resident. You file a North Carolina part-year resident return and report only income earned while you lived in the state. If you moved from another state to North Carolina on June 1, you report income from June 1 through December 31. You do not report income from January through May, even if you earned it while working remotely for a North Carolina employer.

If you worked in North Carolina but lived in another state all year, North Carolina may still tax your income. Many states tax income earned within their borders, regardless of where the worker lives. You would file a North Carolina nonresident return and report only the income from North Carolina work. You may then claim a credit on your home state's return for taxes paid to North Carolina, so you do not pay tax twice on the same income. The credit rules vary by state, so check with your home state's tax authority.

If you moved out of North Carolina and no longer have income from the state, you do not file a North Carolina return. However, if you had income while you lived there, you must file for the year you moved, reporting only the income earned before you left.

North Carolina Sales Tax and Other State Taxes

North Carolina has a sales tax of 4.75 percent on most purchases, plus local add-ons that vary by county. Some counties add 0.5 percent, others add 1 percent or more. Groceries are exempt from sales tax. Prepared food and restaurant meals are taxed. The state also taxes gasoline, cigarettes, and alcohol at specific rates per unit.

North Carolina does not have an estate tax or inheritance tax. If you inherit money or property, you do not owe North Carolina tax on the inheritance itself. However, if the inherited assets generate income — interest, dividends, or rent — you owe tax on that income.

The state taxes business income through the corporate income tax (6.25 percent for C corporations) and through individual income tax for sole proprietors and pass-through entities like S corporations and partnerships. If you own a business structured as an S corporation or partnership, you report your share of business income on your individual return and pay the 4.99 percent individual income tax rate.

How to File Your North Carolina State Return

You file your North Carolina return using Form D-400 (Individual Income Tax Return). You can file on paper by mailing it to the North Carolina Department of Revenue, or you can file electronically through the state's online system or through tax software that supports North Carolina returns. Most tax software (TurboTax, H&R Block, TaxAct) includes North Carolina forms.

You must file your North Carolina return by the same important date as your federal return — typically April 15, though the important date may shift if April 15 falls on a weekend or holiday. If you file your federal return late, your North Carolina return is also late. You can request an extension for both at the same time.

When you file, you will need your Social Security number, your income documents (W-2s, 1099s, K-1s), and information about deductions and credits you are claiming. If you paid estimated tax during the year, bring those payment records. If you had tax withheld from your paychecks, your employer should have sent you a W-2 showing the amount withheld for North Carolina state tax.

Frequently Asked Questions

Do I owe North Carolina tax if I work remotely for a company in another state?

If you live in North Carolina and work remotely, you owe North Carolina tax on your wages, even if your employer is located elsewhere. North Carolina taxes income earned by residents, regardless of where the employer is based. If you live in another state and work remotely for a North Carolina employer, North Carolina may tax that income — the rules depend on the employer's location and your work arrangement.

What is the difference between North Carolina's flat tax and the federal progressive tax?

North Carolina taxes all taxable income at 4.99 percent. The federal government uses brackets: a single filer in 2024 pays 10 percent on the first portion of income, then 12 percent on the next portion, and so on, up to 37 percent on the highest bracket. This means your federal rate increases as you earn more, while your North Carolina rate stays the same.

Can I claim a credit if I paid tax to another state?

Yes, if you paid income tax to another state on the same income you are reporting to North Carolina, you may be able to claim a credit on your North Carolina return to avoid double taxation. The credit is limited to the lesser of the tax you paid to the other state or the North Carolina tax on that income. You will need documentation of the tax paid to the other state.

Do I have to file a North Carolina return if I only earned a small amount?

Only if your income exceeded the filing threshold for your filing status. For 2023, a single person under 65 must file if they earned at least $12,750. If you earned less, you do not have to file a state return, though you may want to if you had tax withheld — you could receive a refund.

Is North Carolina tax withheld from my paycheck?

Yes, if you work in North Carolina or for a North Carolina employer, your employer should withhold North Carolina state tax from your paycheck. The amount depends on your W-4 form and your income. You can adjust your withholding by submitting a new W-4 to your employer. If too much is withheld, you receive a refund when you file your return. If too little is withheld, you owe when you file.