"ITIN Contractors" – What North Carolina Construction Companies Need to Know to Minimize Risk

by Ward and Smith, P.A.
Contact

As explained in an earlier article, the North Carolina Department of Revenue (the "NCDOR") has aggressively audited North Carolina construction companies on the issue of whether they are properly withholding with respect to payments they make to their Individual Taxpayer Identification Number ("ITIN") contractors. We continue to see the NCDOR targeting North Carolina construction companies on this issue, so you continue to need to be aware of the issues involved, including how you and your human resources team should handle ITIN contractors. 

While we have been able to negotiate very favorable settlements in a number of these audits, the process is daunting and takes valuable time from your finance and human resources professionals. Pursuant to the old adage that "an ounce of prevention is worth a pound of cure," to limit your exposure, you should seek to identify your ITIN contractors and properly withhold with respect to payments you make to them.    

What is an ITIN?

An ITIN is issued by the Internal Revenue Service ("IRS") to individuals who are required to file United States tax returns but who are not eligible to receive a Social Security number. For example, a legal immigrant who is in the United States pursuant to a valid "green card" and who operates a sole proprietorship in North Carolina would be required to pay federal and North Carolina taxes, but would not be entitled to a Social Security number.  Therefore, this individual would be required to obtain an ITIN from the IRS. 

All ITINs have the same numbering format as a Social Security number, but they all begin with the number "9," which makes it easier for your construction company to identify that it may have an ITIN contractor withholding obligation.

What is an ITIN Contractor?

An ITIN contractor is an individual, including a sole proprietor, who:

  • Performs services for your construction company;
  • Uses an ITIN for tax reporting purposes (instead of a Social Security number or an Employer Identification Number ("EIN")); and,
  • Is treated by your company as an independent contractor and not an employee.

Any independent contractor who uses an ITIN number for tax reporting purposes and provides subcontracted labor to your construction company would be considered an ITIN contractor.

What Type of Special Withholding Requirement Applies to ITIN Contractors?

Although your company doesn't generally have any obligation to withhold from amounts you pay to independent contractors, it may have a withholding obligation for its ITIN contractors. All North Carolina businesses that pay more than $1,500 in any year to an ITIN contractor are required to withhold 4% of the payments and forward the withheld amounts to the NCDOR.  The policy rationale behind the withholding is to ensure that the state is collecting at least a portion of the income taxes due from the ITIN contractors, who are thought to often be transient workers who may not otherwise properly file tax returns and pay taxes to North Carolina. 

What is the NCDOR Doing About ITIN Contractor Withholdings?

Starting in 2016, the NCDOR identified the ITIN contractor withholding issue as one of its top audit priorities because it was, and continues to be, concerned that businesses using ITIN contractors are not complying with the 4% withholding requirement. Because the construction industry is one of several industries using a significant number of ITIN contractors, the NCDOR has been especially aggressive in targeting construction companies for the ITIN contractor withholding audits.  These audits can result in significant assessments of past due taxes, interest, and penalties.  

Unfortunately, the NCDOR has not done a very good job of educating construction companies and their advisors about the ITIN contractor withholding requirement, so a lot of construction companies only learn about it as a result of an audit that results in unexpected and expensive consequences.

What Should Your Construction Company Do if It Becomes the Subject of an ITIN Contractor Withholding Audit?

First, your company must take all proper actions to comply with the ITIN contractor withholding rules before it becomes subject to any audit. But if you didn't timely comply with the withholding requirement and the NCDOR institutes an audit of your company, you need to consult with your tax and legal advisors immediately in order to develop a strategy to minimize your exposure to additional taxes, interest, and penalties. 

There are a number of strategies you can employ as part of an audit defense, most of which relate to limiting the number of people covered by the scope of the audit and obtaining credit against your withholding obligation for those tax payments your ITIN contractors have actually made. Additionally, there are several nuances related to these audits and the ITIN contractor withholding requirement that, if properly applied, can limit your tax liability.

Ward and Smith's Construction and Tax Practice Groups have significant experience in helping large, medium, and small construction companies comply with the ITIN contractor withholding requirement and defending against ITIN contractor withholding audits.

While we hope that you never have to deal with the headaches involved with an ITIN contractor withholding audit, we stand ready to help you and your accounting team with your ITIN contractor withholding compliance or, if necessary, navigate the nuances related to an audit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ward and Smith, P.A. | Attorney Advertising

Written by:

Ward and Smith, P.A.
Contact
more
less

Ward and Smith, P.A. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.