The basic rule
Two ideas cover most situations:
- Your home state taxes all your income, wherever you earned it.
- The other state taxes only the income earned there, such as wages for work physically done in that state, or rent from a property located there.
That would mean paying twice on the same income, so your home state gives you a credit for the tax you paid the other state. You still file both returns. The credit keeps the total close to what you would owe if you only paid the higher of the two.
North and South Carolina have no reciprocity agreement. Some neighboring states agree to tax only residents. These two do not, which is why the credit and the second return always come into it.
Live in South Carolina, work in North Carolina
The most common version around here: a household in Fort Mill, Tega Cay, Indian Land or Rock Hill with a paycheck from a Charlotte employer.
- North Carolina nonresident return (Form D-400 with Schedule PN), reporting the wages earned working in NC
- South Carolina resident return (SC1040), reporting all your income, with a credit for the North Carolina tax on Schedule SC1040TC
Your employer should withhold North Carolina tax on those wages. If they withhold South Carolina tax instead, or nothing, you can end up owing North Carolina in April while waiting on a South Carolina refund.
Working from home changes the math
North Carolina taxes nonresidents on wages for work performed in North Carolina. Days you work from your home in South Carolina are generally South Carolina income only. If you are hybrid, the split should follow the days, and your W-2 often does not. Keep a simple record of where you worked.
Live in North Carolina, work in South Carolina
The same rules in reverse. You file a South Carolina nonresident return for the SC wages and a North Carolina resident return reporting everything, with North Carolina's credit for tax paid to another state.
This comes up for Waxhaw and Union County residents working in Indian Land, Lancaster or Rock Hill, and for contractors who take jobs across the line.
Moving between the Carolinas
If you moved from one state to the other during the year, you are a part-year resident of both. Each state taxes what you earned while you lived there, plus any income from sources in that state while you lived elsewhere.
The move date matters, and so do the details: when you changed your driver's license and voter registration, where your kids went to school, when you sold or rented out the old house. If a move is coming, talk to us before year end. The date you pick can change the bill.
South Carolina also taxes owner occupied homes at a lower assessment ratio, but only after you apply with the county. New SC residents often miss it. More on the Fort Mill page.
Business owners with activity in both states
For owners of LLCs, partnerships and S corps, crossing the line adds a layer:
- Registering in the second state. An NC company doing regular business in SC, or the reverse, generally needs to register there too
- Apportionment. Business income is divided between the states based on where sales and activity happen
- Nonresident owners. Both states have rules for owners who live in the other state, including withholding or composite filing at the business level
- Payroll. Employees are generally withheld for the state where they do the work. A crew that works in both states needs both set up
- Sales tax. Each state has its own sales tax registration and rules. North Carolina contractors in particular have rules on real property jobs that South Carolina handles differently
- Local licenses. North Carolina has no general local business license. South Carolina towns and counties do
Both states also offer an elective entity level income tax for pass-through businesses, which can help owners work around the federal cap on state tax deductions. With owners in two states, it takes some care to get the credits right. That is a tax planning conversation.
Rental property across the line
Rent is taxed where the property is. A Charlotte resident with a rental in Fort Mill files a South Carolina nonresident return for it, and reports the same rental on the North Carolina return with a credit. The reverse is true for a South Carolina resident with an NC rental.
Depreciation also differs by state. North Carolina does not follow federal bonus depreciation, so a cost segregation study on an NC property creates a different state picture than on an SC one. See real estate tax strategy.
The mistakes we fix most
- Employer withholding for the wrong state, or for only one
- No record of remote work days, so all the wages were treated as North Carolina income
- The credit for taxes paid to the other state claimed on the wrong return, or not at all
- A move year filed as if the person lived in one state all year
- A business working in both states but registered in only one
- New South Carolina homeowners paying the rental rate on their primary residence
Most of these can be fixed with an amended return if they are caught within the normal time limits. We see these on returns from all over the metro. More on tax preparation for Charlotte businesses and households.
Questions we get asked
I live in South Carolina and work in North Carolina. Do I file two state returns?
Yes. A North Carolina nonresident return for the wages earned working in NC, and a South Carolina resident return for all your income, with a credit for the North Carolina tax.
Do North and South Carolina have a reciprocity agreement?
No. There is no reciprocal agreement between the two states, so nonresident wages are taxed where the work is done and the home state gives a credit.
I work from home in SC for a North Carolina company. Do I owe North Carolina tax?
Generally not on the days you actually work in South Carolina. North Carolina taxes nonresidents on wages for work performed in North Carolina. If you are hybrid, the days you work in NC are NC income. Keep a record.
I moved from North Carolina to South Carolina this year. What do I file?
A part-year resident return in each state. Each state taxes the income you earned while living there, plus income sourced to that state for the rest of the year.