North Carolina’s corporate income tax is a flat rate of 6.9 percent. By contrast, many small businesses are taxed at the individual income tax rate of 8.0 percent (and, prior to January 1, 2007, at 8.25 percent).
North Carolina’s individual income tax applies both to individuals and to many small businesses that operate as sole proprietorships, partnerships, limited liability companies, and S Corporations. The individual income tax rate is based on a sliding scale that taxes persons and businesses with higher incomes at a higher rate. The current tax bracket ranges from 6 percent for those with the least income to 8 percent for those earning from more than $100,000 to more than $200,000, depending on whether a person files a joint return as a married person, as a head of household, an unmarried individual, or as a married person filing a single return. Unmarried individuals, for example, fall into the following brackets: 6 percent for earnings from .01 cent to $12,750; 7 percent for earnings from $12,750.01 to $60,000; 7.75 percent for earnings $60,000.01 to $120,000; and 8 percent for earnings more than $120,000.
Because many small businesses fall into the highest individual tax categories
($100,000/$200,000), these businesses must pay the higher individual income tax of 8 percent. Thus, many of the businesses that can least afford it are being taxed at a higher rate than their corporate competitors, who pay only 6.9 percent. Yet, according to the U.S. Small Business Administration, small businesses account for half of the private workforce in the United States and between 60 to 80 percent of net new jobs annually. Higher taxes on small businesses translate into fewer jobs for hardworking Americans and higher prices for consumers.
Until 2007, North Carolina’s income tax rate was 8.25 percent – thanks to a 2001 “temporary” income tax hike of 0.5 percent. After being on the books for six years, the rate fell to 8 percent on January 1, 2007, and is scheduled to fall back down to 7.75 percent on January 1, 2008. At 8.25 percent, North Carolina had the highest marginal income tax rate in the South and the 10th highest in the United States. By comparison, as of 2006, the highest bracket in South Carolina was 7 percent; 6 percent in Georgia; 5.75 percent in Virginia; and 5 percent in Alabama. Florida has no state income tax whatsoever; and Tennessee only taxes dividends and interest income, but not earned income. Thus even if the rate is lowered as promised, North Carolina will most likely continue to have higher individual income taxes than any ofits neighbors.