Business taxes
South Carolina Withholding for Nonresident Partners and S Corporation Shareholders
A partnership or S corporation with South Carolina income must withhold 5% of each nonresident owner's share of South Carolina taxable income, whether or not it distributed any cash, and pay it by the 15th day of the third month after year end. No withholding is required for an owner who files an I-309 affidavit, joins a composite return or is tax-exempt, or on income the entity already paid tax on under the 3% entity-level election.
- The rate is 5% of the nonresident's share of South Carolina taxable income, distributed or not (S.C. Code 12-8-590).
- It is due by the 15th day of the third month after the tax year ends: 15 March for a calendar-year entity. A filing extension does not extend it.
- Owners receive a 1099-MISC marked for South Carolina only, and claim the withholding on their own SC1040.
- Exceptions: an I-309 nonresident affidavit, participation in a composite return, tax-exempt status under IRC 501(a), or income taxed at the entity level.
- Withholding paid for owners cannot be used to pay the entity's own South Carolina tax.
Who this applies to
- Partnerships and multi-member LLCs with one or more partners living outside South Carolina
- S corporations, including LLCs taxed as S corporations, with an out-of-state shareholder
- Owners who moved away from South Carolina but kept their interest in a Charleston-area business
- Out-of-state investors in South Carolina real estate partnerships
Who this may not apply to
- Owners who are South Carolina residents for the full year
- Nonresident owners who signed an I-309 or are included in a composite return
- Income the entity paid tax on under the 3% active trade or business entity-level election
Why South Carolina withholds from owners at all
A resident partner or shareholder reports South Carolina K-1 income on a South Carolina return because they live here. An out-of-state owner owes South Carolina tax on their share of the business's South Carolina income too, but the state has no easy way to collect from someone who may never file. S.C. Code 12-8-590 solves that by making the entity collect in advance: it withholds a percentage of the nonresident's share and pays it to the SCDOR, and the owner then claims it as a credit.
Three features catch businesses off guard. The withholding is computed on income, not on distributions, so it is owed even in a year the company kept every dollar. It is due earlier than most people expect, at the original due date of the SC1065 or SC1120S. And the money is the owner's prepayment, not the company's tax, so it cannot be shifted to cover the entity's own liability later.
The mechanics
- Rate: 5% of each nonresident owner's share of South Carolina taxable income.
- Due date: the 15th day of the third month after the tax year closes. For a calendar-year entity, 15 March 2027 for tax year 2026.
- How it is paid: S corporations file and pay with the SC1120S-WH. Partnerships owe it by the same date under the same statute; the SCDOR partnership page notes that an extension to file the SC1065 is not an extension to remit it.
- Owner statement: by the same date, give each nonresident owner a federal 1099-MISC marked for South Carolina only, showing the amount withheld.
- Extensions: an extension extends the time to file the entity return, not the time to pay the withholding. Estimate it and pay it by the original date.
- Late payment: the SCDOR applies late-filing and late-payment penalties plus interest if the withholding is not filed and paid in full on time.
The 5% rate is set in 12-8-590 itself. H.4216 changed individual income tax rates for 2026 but did not amend the withholding statutes in Chapter 8, so the 5% entity withholding rate is the same for 2026.
The four ways out
| Route | How it works | Who files what |
|---|---|---|
| I-309 nonresident affidavit | The owner agrees to South Carolina's jurisdiction to tax, and to collect tax, interest and penalties on their share of income. | Owner signs the I-309; the entity attaches it (SC1120S-WH for S corporations; SC1065 or SC8736 for partnerships). Not resubmitted each year. |
| Composite return | The entity files one SC1040 on behalf of two or more electing nonresident individuals, trusts or estates and pays their tax. | Entity files the composite SC1040, due the 15th day of the fourth month after the owners' year end; I-338 affidavits as applicable. |
| Tax-exempt owner | Owners exempt under IRC 501(a) are not subject to withholding. | Owner provides the identifying statement and IRS determination letter the statute requires. |
| Entity-level 3% tax | Income the partnership or S corporation elected to pay tax on under 12-6-545(G) is not subject to nonresident withholding. | Entity elects on page 1 of its return and computes the tax on the I-435. |
The I-309 affidavit
For most small companies with one or two out-of-state owners, the I-309 is the simplest route. The owner is not avoiding tax; they are agreeing to file and pay South Carolina tax directly. For partnerships, the SCDOR says the affidavit stays valid in later years unless the owner's nonresident status changes or the SCDOR revokes the exemption, and each co-owner of a jointly held interest signs their own. For S corporations, a previously filed I-309 should not be resubmitted.
Composite returns
A composite return makes sense when several nonresident owners have no other South Carolina income and would rather not file individually. The I-348 instructions set the rules: the entity files an SC1040 under its own name and FEIN, checks the composite box and single filing status, computes tax separately on each participant's share, and attaches the schedule. Every participant must use the same tax year, corporate partners cannot participate, and composite tax is subject to estimated tax rules through the SC1040ES. An owner who prefers can still file their own return, report the same income, and take credit for the tax paid on their behalf.
What the nonresident owner does next
Withholding is a prepayment, not the final answer. A nonresident owner who was withheld on, or who signed an I-309, files a South Carolina return reporting their South Carolina-source income and claims the withholding shown on the 1099-MISC. For 2026, that return reflects H.4216: Section 5 of the act requires a nonresident's SC Income Adjusted Deduction to be reduced in the proportion that South Carolina AGI bears to federal AGI. Depending on the owner's total income, the 5% withheld may be more or less than the tax actually due, and the return settles the difference.
Owners who move mid-year
The statute applies to nonresident owners, so an owner's residency is the entity's concern, not only the owner's. This is the situation most likely to fall through the cracks: an owner relocates in the summer, nobody tells the bookkeeper, and the K-1 goes out with no withholding and no affidavit. If an owner has moved or plans to, raise it before year end so the residency question is answered and the I-309 or composite decision is made in time for the 15th-day-of-the-third-month deadline.
Haigler CPA Group prepares SC1065 and SC1120S returns with the nonresident withholding, I-309 filings and composite returns, and prepares the nonresident owner's South Carolina return when the owner is also our client. Where the entity-level election might remove the withholding altogether, we compare the two approaches before the return is filed.
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Sources
- S.C. Code Title 12, Chapter 8 (Section 12-8-590, withholding by partnerships and S corporations)
- SCDOR — S Corporation (SC1120S-WH, I-309)
- SCDOR — Partnership (nonresident partner withholding, composite)
- SCDOR — I-348 Composite Filing Instructions
- SCDOR — SC Information Letter #26-23, Tax Legislative Update for 2026
- SC Legislature — H.4216 (Act No. 110 of 2026)
South Carolina publishes new guidance and local governments change their rates, so check the source pages for anything that has moved since the date above. The information on this site is general in nature and is not tax, legal, or accounting advice for your situation. Tax law changes and the right answer depends on facts we would need to review with you. Please speak with a qualified professional before acting on anything you read here.
Questions people ask about this
Does an extension give us more time to pay nonresident withholding?
No. The extension covers the entity's return only. The withholding must be estimated and paid by the 15th day of the third month after year end, which is 15 March for a calendar-year partnership or S corporation.
Can the withholding we paid be applied to the company's own tax?
No. Withholding paid for a nonresident owner belongs to that owner. Only the owner can claim it, on their own South Carolina return, using the 1099-MISC the entity issues.
What is an I-309?
It is a nonresident affidavit in which the owner agrees to South Carolina's jurisdiction to tax their share of the entity's income. If the owner files it, the entity does not withhold, and the owner files and pays South Carolina tax directly.
Do we have to withhold if we did not distribute any money?
Yes. The 5% applies to the nonresident's share of South Carolina taxable income whether or not it was distributed.
Who can be included in a composite return?
Nonresident individuals, trusts and estates that are partners, shareholders or LLC members and that elect to participate. All participants must use the same tax year, and corporate partners or members cannot participate.
Keep reading
- Active trade or business incomeSouth Carolina lets owners of sole proprietorships, partnerships, S corporations and LLCs taxed as one of those choose a 3% rate on active trade or business income instead of the regular individual rates. Individuals elect it each year on Form I-335; a qualifying partnership or S corporation can instead elect to pay the 3% tax itself, computed on Form I-435. H.4216 did not amend the statute, but SCDOR has not yet said how the election fits the new 2026 rate structure.
- Filing a part-year SC returnIn the year you move into or out of South Carolina, Section 12-6-1710 gives you a choice. You can report all of your income for the year as if you were a resident and claim a credit for tax paid to the other state, or you can file as a nonresident using Schedule NR, which taxes everything you earned while a resident plus South Carolina-source income from the rest of the year. Which costs less depends on the other state's tax and on when your income arrived.
- Who counts as an SC residentFor income tax, a South Carolina resident is anyone domiciled here: the place you treat as your permanent or indefinite home and intend to return to. There is no day-count test, so time spent in or out of the state does not settle the question on its own. Once you are domiciled here, you stay a resident until you abandon South Carolina and set up a new permanent home somewhere else.
- LLC vs. S Corporation Taxes in South CarolinaAn LLC and an S corporation are not two competing entities — one is a state-law structure, the other a federal tax election, and most South Carolina owners can have both. What changes is how much of your profit is exposed to self-employment tax.
- SC bonus depreciation addbackSouth Carolina does not allow federal bonus depreciation under IRC Section 168(k). In the year an asset is placed in service, you add back the difference between your federal depreciation and the depreciation you would have claimed without bonus, then take extra South Carolina depreciation in the later years of the same recovery period. The asset carries a higher South Carolina basis until it is fully depreciated or sold.
- SC business license taxSouth Carolina has no statewide business license. Cities and counties that choose to levy one charge a business license tax, an excise on the privilege of doing business that is measured by gross income, not profit. Since Act 176 standardized the rules, every jurisdiction that levies it uses a May 1 to April 30 license year, an April 30 renewal date, a standard application and a common class schedule, but each sets its own rates.
- South Carolina tax guideHow South Carolina taxes income, businesses and property, and what the Charleston area adds on top, with the state or local source beside every rule.
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