Are You Exempt from North Carolina Withholding? Who Qualifies

You can be exempt from North Carolina withholding if you reasonably expect to owe no North Carolina income tax for the calendar year. You claim it by filing Form NC-4 EZ with your employer, and the exemption lasts only one year: a new form is due by February 16 to keep it in place for the next.¹ The exemption stops only state income tax withholding. Federal income tax, Social Security, and Medicare still come out of your check.

North Carolina’s flat rate is 3.99% for tax year 2026, so a valid exemption keeps that share of your wages in your paycheck instead of going to the state.²

Who Qualifies

The test is whether you’ll owe zero North Carolina income tax for the year. In practice, that usually means your gross income sits below the state’s filing threshold, or your deductions and credits eliminate any tax you’d otherwise owe.³

For 2025, North Carolina requires a return only when federal gross income exceeds:

Single: $12,750
Married filing jointly or surviving spouse: $25,500
Married filing separately: $12,750 (or $0 if your spouse itemizes)
Head of household: $19,125

If your expected income for the year falls below the figure for your filing status, you likely have no state tax liability and can claim exempt.⁴

One trap worth flagging: these thresholds are lower than their federal counterparts because North Carolina’s standard deduction is smaller. Someone who owes nothing to the IRS may still owe the state. A federal exemption on your W-4 does not carry over to your NC-4.

Military Spouses

Under the federal Military Spouses Residency Relief Act, a qualifying military spouse’s North Carolina wages can be completely exempt from state income tax. The Department of Revenue requires all three of the following:

The servicemember is in North Carolina solely because of military orders.
The spouse is in North Carolina solely to be with the servicemember.
The spouse is domiciled in the same state as the servicemember, and that state is not North Carolina.

You claim the exemption by filing Form NC-4 EZ with your employer certifying that all three conditions are met.¹ The exemption covers wages tied to the military assignment. Other North Carolina income, such as rental income from property in the state, may still be taxable.

Retirees Covered by the Bailey Settlement

Retirees have their own path out of state withholding. If you had five or more years of creditable service in the North Carolina Teachers’ and State Employees’ Retirement System (TSERS) or the Local Governmental Employees’ Retirement System (LGERS) as of August 12, 1989, your retirement benefits are entirely exempt from North Carolina income tax under the Bailey Settlement. The same rule applies to certain federal retirement systems and to the state’s 401(k) and 457 plans if you contributed or contracted to contribute before that date.⁵ Qualifying retirees should elect no state withholding from their retirement payments, because those benefits carry no North Carolina tax at all.

Retirees who are not North Carolina residents may also owe no state tax on their retirement income and can elect out of withholding on that basis.⁶

How to File

Use Form NC-4 EZ (the simplified version) or the full NC-4. Both are on the North Carolina Department of Revenue website and are also available from most employers. Check the box claiming exempt from withholding, certify that you expect to owe no state income tax for the year, and complete the identification fields. Military spouses use the same NC-4 EZ, certifying the three MSRRA conditions.¹

The form goes to your employer, not to the Department of Revenue. Your employer then adjusts payroll so no state income tax comes out going forward.⁷

Renewing Each Year by February 16

An exempt claim lasts one calendar year. To keep it in place, you must file a new NC-4 EZ with your employer by February 16. If your employer has no new exempt certificate on file by that date, they’re required to start withholding as if you were single with zero allowances.¹

You also have a mid-year duty. If your situation changes and you realize you’ll owe North Carolina tax after all, you have to give your employer a new withholding certificate within 10 days.⁸ Waiting until filing season to correct a bad exemption claim can trigger penalties.

Penalties for a Baseless Claim

Claiming exempt when you know you’ll owe state tax carries real cost. Under state law, if you furnish a withholding certificate with information that has no reasonable basis and the result is less tax withheld than there should have been, the penalty is 50% of the amount that was not properly withheld. That’s on top of the tax itself.⁸

Federal penalties can layer on. Willfully filing a false or fraudulent withholding certificate is a federal crime punishable by a fine of up to $1,000, up to one year in prison, or both.⁹ That statute reaches the federal W-4; a false claim on both the W-4 and the NC-4 creates exposure on each.

The Department of Revenue reviews NC-4 forms and specifically flags exempt claims. If the Department decides your exemption was invalid, your employer is directed to start withholding immediately, and you’ll owe the back tax plus the 50% penalty on the shortfall.¹⁰

1
NCDOR. Withholding Tax Frequently Asked Questions
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NCDOR. Tax Rate Schedules
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North Carolina General Assembly. Chapter 105 Article 4A – Withholding; Estimated Income Tax for Individuals
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NCDOR. Individual Income Filing Requirements
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NCDOR. Bailey Decision Concerning Federal, State and Local Retirement Benefits
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My NC Retirement. Income Tax Withholding
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NCOSC. 700.14 – HR-Payroll Policy – NC-4 Tax Compliance
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North Carolina General Assembly. North Carolina Code 105-163.5 – Employee Withholding Allowances; Certificates
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Office of the Law Revision Counsel. 26 USC 7205 – Fraudulent Withholding Exemption Certificate or Failure to Supply Information
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NCDOR. Employee’s Withholding Allowance Certificate