New paperwork required for tax withholdings
Employees in North Carolina will need to fill out new tax withholding forms soon to comply with a sweeping change in tax laws that goes into effect in a couple of weeks.
The Tax Simplification and Reduction Act was passed by the Republican majority in Raleigh this year and replaces the three-tiered personal income tax (6 percent — 7.75 percent) with a flat income tax rate of 5.8 percent in 2014 and 5.75 percent in 2015.
The standard deductions, or the amount of income taxpayers who don't itemize expenses can earn without paying taxes on it, will also increase for all taxpayers. Married couples filing jointly will have a standard deduction of $15,000, as opposed to $6,000 under the old system; the heads of household deduction will be $12,000 compared to $4,400 and single filers can earn $7,500 as opposed to $3,000 before paying the flat income tax.
The state Department of Revenue notified employers last month that updated withholding forms needed to be filled out and turned back in by Dec. 31. However, the forms weren’t made available online until this week.
The new law changes the tax withholding rules under which employers deduct income taxes from paychecks. In the past, individuals determined the number of exemptions claimed on withholding forms. Employees could choose "0" which meant more taxes were taken out than may be needed, likely resulting in a tax refund at the year's end, or could claim however many individuals were in their family who relied on their support.
For any employee who does not provide a new NC-4 EZ or NC-4 form, employers must withhold state income tax at the rate of single taxpayer with zero allowances, according to a press release from the Department of Revenue. For any pension recipient who does not provide an updated pension withholding form, the payer must withhold at the rate of a married individual with three allowances.
Waynesville CPA Will Crook said the new NC-4 EZ forms are much easier to understand and complete than the old forms. The new form requires employees to look at a chart to determine what their exemption will be depending on their marital status, number of children in the home and income category. But if a person has more questions, he recommended contacting an accountant or advisor.
Simplifying the code
Crook said the tax code was basically simplified and wouldn’t mean a significant increase or decrease in the individual’s tax return. With personal exemptions eliminated, he said people may have a higher taxable income, but it will be taxed at a lower rate.
“Most W-2 wage earners are not going to see much of a difference at the end of the day,” he said. “But with every piece of legislation, there are winners and losers.”
Crook said the “loser” in this situation was small businesses — a majority of his clients. The tax reform does away with the $50,000 income deduction for small businesses, a recent perk they have become quite accustomed. For a small business that may only earn $40,000 in net income for the year, a full deduction of that amount is significant.
“Many of my clients are small business owners who got used to that deduction so it’s kind of a rude shock for them,” he said.
Supporters of the reform, including Rep. Michele Presnell, R-Burnsville, argue that the new laws have been dramatically simplified, making it fairer for all taxpayers and making North Carolina more competitive with other states.
According to Taxfoundation.org, North Carolina's 2010 tax burden of 9.91 percent ranks 17th highest out of 50 states, and is above the national average of 9.9 percent. North Carolina's taxpayers pay $3,535 per capita in state and local taxes.
“Starting in January 2014, this new, simplified income tax code makes North Carolina one most competitive states in the nation for attracting industry by reducing corporate income tax rate from 6.9 percent to 6 percent in 2014 and 5 percent in 2015,” she said in a press release.
Crook agreed that the new lower corporate tax rate would be more appealing to big businesses and corporations looking to relocate or open a new location in North Carolina. But it won’t be an advantage to small business owners that operate as a “flow-through entity” — meaning their business income is filed on their personal taxes.
Copies of all forms, as well as support information such as frequently asked questions, can be found by visiting NCDOR’s website at www.dornc.com. For taxpayers who require assistance completing the forms, contact DOR at 1-877-252-4487. This toll free number is staffed by specially trained NCDOR employees and will be available until Feb. 28.