"You can't hear me? Hey (N-word)."
Fellow drivers in the race then tried to tell Larson that he wasn't in a private channel and everyone could hear him.
Larson posted a video on his Twitter apologizing.
The race on Sunday night was a practice race against multiple drivers and not an actual event in the series.
Last week, driver Bubba Wallace quit mid-race due to rage on the live stream and was fired immediately by his sponsor, Blue-Emu.
In 2013, Xfinity Series driver Jeremy Clements was suspended for saying the N-word and was reinstated after completing a sensitivity training course.
Larson is half Japanese and climbed up the NASCAR ranks through its "Drive for Diversity program."
Larson is sponsored by McDonalds and Credit One Bank.
"We are extremely disappointed by what Kyle said last night during an iRacing event," CGR said in a statement. "The words that he chose to use are offensive and unacceptable. As of this moment we are suspending Kyle without pay while we work through this situation with all appropriate parties."