Paul Sanchez
North Carolina imposes several taxes on insurance companies, including taxes on captive insurance companies, gross premiums, and company fees. The state also levies taxes on insurers for the privilege of doing business in the state. These taxes are based on gross premiums from business conducted in North Carolina, with certain exemptions and deductions allowed. The tax rates vary depending on the type of insurance contract, such as workers' compensation or property coverage contracts. Taxpayers are required to file reports and make installment payments according to specific deadlines. Understanding the tax implications of insurance products in North Carolina is essential for both insurers and individuals to ensure compliance with the state's tax regulations.
| Characteristics | Values |
|---|---|
| Location | North Carolina |
| Type of tax | Insurance premium tax |
| Taxpayers | Insurers, both domestic and foreign |
| Tax base | Gross premiums |
| Tax rate | 1.9% for most insurance contracts; 2.5% for workers' compensation contracts; 0.74% additional tax for property coverage contracts |
| Tax period | Quarterly installments due on April 15, June 15, and October 15 of each taxable year |
| Payment deadline | March 15 of the following year |
| Exemptions | Farmers' mutual assessment fire insurance companies, fraternal orders or societies that do not operate for profit, special purpose financial captives with total premium tax exceeding $100,000 |
| Deductions | Premiums refunded on policies rescinded for fraud or breach of contract, advance premiums on life insurance contracts that are subsequently refunded |
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What You'll Learn
Captive insurance companies
In North Carolina, insurance companies are taxed on their gross premiums from business conducted in the state during the calendar year. This includes finance charges. For captive insurance companies, the tax is based on all direct premiums and assumed reinsurance premiums. In the case of a multiyear policy or contract, the premiums must be prorated among the years covered by the policy or contract. Taxable direct premiums do not include amounts paid to policyholders as return premiums.
Return premiums may include dividends on unabsorbed premiums or premium deposits returned or credited to policyholders. The premium tax on assumed reinsurance premiums does not apply to premiums for risks or portions of risks that are subject to taxation on a direct basis. Insurers can deduct premiums refunded on policies rescinded for fraud or other breach of contract. They can also deduct premiums that were paid in advance on life insurance contracts and subsequently refunded to the insured, premium payer, beneficiary, or estate.
When allocating premiums to the state, no distinction is made between group and individual insurance policies. Gross premiums from group policies that cover individuals living in North Carolina are taxable by the state, regardless of the address of the policyholder, policy owner, or beneficiary. The determining factor is the residence of the insured. If returned premiums exceed gross premiums collected in a tax year, insurers may reduce taxable premiums to zero.
Company fees charged by the insurance company are also taxable and are considered part of the premium. This is subject to surplus lines tax and a stamping fee. There are statutory exemptions for certain types of policies under the North Carolina Surplus Lines Act. Policies with non-taxable status codes are not subject to surplus lines premium tax but are still subject to the stamping fee.
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Group insurance policies
In North Carolina, gross premiums from group insurance policies are taxable by the state. This is the case regardless of the address of the policyholder, policy owner, or beneficiary. The determining factor is the residence of the insured. Therefore, if a group insurance policy covers individuals living in North Carolina, the gross premiums are taxable in the state.
The tax imposed on insurers in North Carolina is based on gross premiums from business done in the state during the calendar year. This includes finance charges. For life insurance contracts, gross premiums refer to all premiums collected in the calendar year. Insurers can deduct premiums refunded due to fraud or breach of contract and those refunded after being paid in advance on life insurance contracts.
In the case of captive insurance companies taxed under G.S. 105-228.4A, the tax is based on direct premiums and assumed reinsurance premiums. For multiyear policies, the premiums must be prorated among the years covered. Taxable direct premiums do not include amounts paid to policyholders as return premiums, which can include dividends on unabsorbed premiums or premium deposits returned or credited to policyholders.
When it comes to group insurance procured by North Carolina Farm Bureau agents, there may be specific considerations. In one case, a California insurance company, Sequoia Insurance Company, issued an "Errors and Omissions" master group policy to an Illinois company, American Agricultural Insurance Agency, Inc. (AAIAI). AAIAI then issued certificates of insurance to North Carolina Farm Bureau agencies, and premiums were paid annually to the North Carolina Farm Bureau Insurance Agency, Inc. (N.C. Agency). The N.C. Agency withheld a 5% brokerage commission from the gross premiums and forwarded the rest to AAIAI. While there was no direct payment made to the State of North Carolina as a tax on these premiums, G.S. 58-53.3 imposes a 5% premium tax on insurance procured from a company not licensed to do business in the state.
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Workers' compensation
In North Carolina, workers' compensation benefits are generally not taxable. This means that if a worker suffers a job-related injury or illness, the benefits they receive through their employer's insurance are not subject to federal or state income taxes. These benefits cover the cost of medical care and provide partial income replacement through weekly payments.
However, there are certain situations where workers' compensation can impact an individual's tax liability. For instance, if an individual receives both workers' compensation and Social Security Disability Insurance (SSDI), the combined total of these benefits cannot surpass 80% of their average pre-disability earnings. If this limit is exceeded, their SSDI benefits will be reduced until they reach full retirement age. Additionally, interest accrued on a workers' compensation settlement is typically subject to taxation.
In North Carolina, businesses with one or more employees engaged in activities involving radiation are mandated to carry workers' compensation insurance. This insurance is also required for businesses with three or more employees, excluding specific exemptions for agricultural employment, certain sawmill and logging operations, and domestic employees. Subcontractors who lack workers' compensation insurance may render the primary contractor liable for work-related injuries sustained by the subcontractor's employees.
The North Carolina Industrial Commission was established to oversee the state's Workers' Compensation Act and provide guidance to both employees and employers regarding workers' compensation. The commission can be contacted for clarification on any workers' compensation-related queries.
While workers' compensation benefits are typically exempt from taxation in North Carolina, it is always advisable to consult with a tax professional or a North Carolina workers' compensation attorney to address specific circumstances and ensure compliance with the most current tax regulations.
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Life insurance contracts
In North Carolina, life insurance proceeds are typically considered tax-free. However, it is important to note that while the beneficiary of a life insurance policy generally does not have to pay income taxes on the death benefits received, these benefits are counted as part of the beneficiary's gross taxable estate. This means that the value of the life insurance policy will be included when calculating the total amount of taxes owed on the estate.
In terms of taxation on insurance companies, North Carolina levies several types of insurance premiums tax upon insurers, both domestic and foreign, for providing insurance services within the state. This includes taxes on gross premiums from life insurance contracts, including supplemental contracts providing for disability benefits, accidental death benefits, or other special benefits that are not annuities. Insurers are allowed to deduct premiums refunded on policies rescinded due to fraud or breach of contract, as well as premiums that were paid in advance on life insurance contracts and subsequently refunded to the insured, premium payer, beneficiary, or estate.
Additionally, company fees charged by insurance companies are taxable in North Carolina and are considered part of the premium, subject to surplus lines tax and stamping fees. However, fees retained by the broker are not subject to these taxes. There are also statutory exemptions for certain types of policies under the North Carolina Surplus Lines Act, where policies with non-taxable status codes are exempt from the surplus lines premium tax.
While the focus is on life insurance contracts, it is worth noting that North Carolina also taxes captive insurance companies based on direct premiums and assumed reinsurance premiums, prorated over the years covered by the policy or contract. Taxable direct premiums do not include amounts returned to policyholders as return premiums, including dividends on unabsorbed premiums or premium deposits.
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Company fees
In North Carolina, company fees charged by the insurance company (insurer) are taxable. The North Carolina Department of Insurance (NCDOI) considers all fees charged by the insurer to be part of the premium and are therefore subject to the surplus lines tax and stamping fee.
The North Carolina surplus lines tax is 5% on all taxable transactions, including premiums, company fees, and endorsements entered in SLIP. The stamping fee percentage charged on the premium is based on the effective date of the policy. For instance, for all new and renewal policies with an effective date of January 1, 2023, or later, the stamping fee is 0.3% of the premium.
If North Carolina is the home state, all premiums, including foreign premiums, must be declared in the tax filing. However, if the premiums can be separated into domestic and foreign, and proof of foreign tax payments is provided, an exception can be requested from the NCDOI.
For captive insurance companies taxed under G.S. 105-228.4A, the tax is based on all direct premiums and assumed reinsurance premiums. In the case of multiyear policies, the premiums must be prorated among the years covered. Taxable direct premiums do not include amounts paid to policyholders as return premiums. If returned premiums exceed gross premiums collected in a tax year, insurers may reduce taxable premiums to zero.
The tax rate applied to gross premiums on taxable contracts issued by insurers or health maintenance organizations is 1.9%. An additional tax of 0.74% is levied on gross premiums from insurance contracts for property coverage, with 10% applied to automobile physical damage coverage and 100% to all other contracts for property coverage.
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Frequently asked questions
Yes, North Carolina levies several types of insurance premiums tax on insurers for providing insurance in the state.
The tax rate to be applied to gross premiums on all taxable contracts issued by insurers or health maintenance organisations is 1.9%. An additional tax of 0.74% applies to gross premiums on insurance contracts for property coverage.
Yes, there are some exemptions. For example, farmers' mutual assessment fire insurance companies and fraternal orders or societies that do not operate for profit are exempt. Additionally, certain policies may have non-taxable status under the North Carolina Surplus Lines Act.
The tax imposed on captive insurance companies is based on all direct premiums and assumed reinsurance premiums. In the case of a multiyear policy, the premiums must be prorated among the years covered.
Yes, insurers are allowed to deduct premiums refunded on policies rescinded for fraud or breach of contract. Additionally, if returned premiums exceed gross premiums collected in a tax year, insurers may reduce taxable premiums to zero for that year.
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