A client based outside of North Carolina withheld federal tax but not state tax for North Carolina distributions. When told they should have withheld state taxes, their response was that they are not liscensed to withhold taxes in North Carolina so they did not. They assumed the participant would pay any required taxes when they filed their state income taxes.

Is there a penalty for not withholding? If yes, what is the penalty?

How could they withhold for distributions in the future?

This is a tax question not a benefits q and depends on whether the plan would be deemed to be doing business in NC. An entity that does business in a state, e.g. ,maintains an office or has employees working there is doing busines and is subject to state tax laws. However, if the plan/employer does not have a presence in the state there is no requirement to comply with state laws. Was the distributon paid to an employee who worked in NC for the employer or did the plan merely make a distribution to a retired employee who lives in NC. I dont know if a plan would be considered a separate entity from the employer for state tax purposes.

The distributions were to participants who retired and now live in NC.

The employer has offices in several states but no office in NC that I am aware of.

I do not know if there is a penalty for failure to withhold state tax…however, for pension plans, the payer should withhold for the participant’s state of domicile…regardless of the participants prior state of residence of the payer’s state of doing business.

Check http://www.dor.state.nc.us …this should have information about withholding agents’ registration ( to perform state tax withholding) etc.

Our business is located in Florida as are all of our employees except for 1. He resides and works in North Carolina supporting a government contract. We are required to withhold North Carolina taxes (income and unemployment tax).