Delaware LLC Taxes

How Is an LLC Taxed in Delaware?

Taxation in Delaware isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax election.

While LLCs typically benefit from pass-through taxation by default, they can elect to be taxed as one of the following:

• C Corporations: The LLC is treated as a separate entity to its owners, paying corporate income tax rates on its total profit while the owners also pay personal income taxes on any distributions they take.
• S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay FICA or self-employment taxes on them.

The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in Delaware to help you ensure your LLC navigates them effectively.

Delaware Local Taxes

The local laws and tax regulations differ greatly between different localities in Delaware, where there are currently a number of unique taxes in place at a local level.

Below, we’ve broken down the various types of taxes that your city or county may impose:

Income Tax

In Delaware, any city with more than 50,000 residents is permitted to impose an income tax at a rate of 1.25%. These income taxes are applicable to:

1. All income earned by residents, regardless of where it’s earned; and 
2. The total income earned within the city by nonresidents.

For the moment, the only special city tax of this kind in Delaware is the earned income tax in Wilmington (in effect since 1973).

Despite being the only one of its kind, it’s important to note that local laws and tax regulations are constantly being updated. Be sure to regularly check with your local government to find out if your LLC will need to pay taxes at this local level.

Property Tax

In Delaware, there’s no statewide property tax; instead, this tax is levied locally in order to support municipal and county governments as well as school districts. With that being said, Delaware stands out as having the seventh-lowest property tax rate among US states, with an average effective rate of only 0.53%.

Tax assessment dates, proportions, and rates vary among the three counties, as well as municipalities and school districts, which typically use county assessments for property tax calculations, with some noted exceptions.

Additionally, unlike many other states, this tax only applies to real property, meaning it’s exclusively levied on land and any permanent structures or improvements on it, such as buildings or homes. As such, your LLC will not need to pay this tax on any of its personal property, such as vehicles, furniture, or equipment. 

Note: To find the relevant property tax information for your municipality, use the Incorporated Municipalities Directory run by the Government Information Center (GIC) to contact the relevant local governing body in your area.

Delaware State Taxes

Every state has its own regulations and rules that dictate how it taxes individuals and businesses. Below is a list of the most relevant state-level taxes for LLCs in Delaware. 

Income Taxes

This group of taxes refers to the charges imposed by the state on the earnings of individuals and entities operating within Delaware. As an LLC based in this state, there are two key types of income taxes to be aware of:

• Personal Income Taxes: This is a gradual tax applied to all income over $2,000 that varies between a minimum tax rate of 2.20% and a maximum tax rate of 6.60% depending on how much revenue your business generates. You can use the Division of Revenue’s most recent Income Tax Table to figure out how much you owe.
• Corporate Income Taxes: This tax is levied at a flat rate of 8.70% on the total taxable income generated by corporations and limited liability companies that have elected to be taxed as a C Corp. 

Gross Receipts Tax

Instead of sales tax, Delaware imposes a Gross Receipts Tax on businesses involved in the sales of both tangible and intangible goods, as well as those providing services. Unlike sales tax, this is levied on your LLC as the seller of the goods instead of your customers.

The rates of this tax vary between 0.0945% and 0.7468% depending on the sort of business activities your LLC is involved in. For example, the products and professions listed below are just some of the full list that are subject to their own unique tax rates:

• Banks and Insurance Companies
• Cigarette & Other Tobacco Products
• Contractors/Real Estate Developers
• Health Care Facilities
• Hotel, Motel, Tourist Home

If your business generates income from a number of these different sources, it will need to submit a separate gross receipts tax for each one.

While you won’t be able to deduct any business expenses, such as the cost of goods sold, labor, interest, or delivery charges, from your total gross receipts tax bill, most businesses are entitled to an exclusion to balance this out. This is a specific amount of your total revenue that is exempt from gross receipts tax.

The size of the exclusion your business is entitled to varies from $100,000 up to $1.25 million, depending on the profession it’s involved in. This means that the first $100,000 of your business’s monthly revenue is not subjected to the gross receipts tax if it’s entitled to an exclusion of this amount, as is the case with healthcare facilities.

Note: To find out the specific tax rate and exclusion amount that apply to your LLC, use the Division of Revenue’s Business Tax Tips page to search by your business activity.

Employer Taxes

Your LLC will be required to pay this group of taxes if it employs any workers. In Delaware, there are two main employer taxes to be aware of at a state level: withholding tax and unemployment insurance tax.

Withholding Tax

One of the key state-level taxes you’ll need to manage if your business has any employees is withholding tax. This isn’t a tax that comes out of your business’s profits; instead, it’s an amount you’ll deduct from your employees’ salaries and then pay to the government.

While you won’t be the one paying for this tax, it’s still your responsibility as the employer to handle it on behalf of your workers. When calculating the correct amount to withhold, you’ll need to use each employee’s earnings, the information included on their W-4 forms, and the current year’s withholding tax tables.

Note: New employers will need to register through the Delaware One Stop online portal to open a withholding account and collect this tax.

Unemployment Insurance (UI) Tax

The second important statewide tax for employers in Delaware is the unemployment insurance (UI) tax. This is a mandatory contribution that all businesses with employees must make toward the state’s unemployment insurance fund.

The amount your business will need to pay in UI taxes is calculated on the taxable wage base of each employee. This is a maximum limit placed on each employee’s wages that your business will need to pay UI tax on – in the current tax year, this is set at $10,500 per employee in Delaware.

In addition to the size of your taxable payroll, your tax bill can vary depending on the rate at which you pay UI insurance. Your UI tax rate is generally dictated by how long you’ve been paying wages:

• New Employers: Businesses with a history of wage payments that are shorter than three years are required to pay UI tax at a rate of 1.2%.
• Everyone Else: After your business is no longer considered new, the rate varies between 0.1% and 5.4%, based on how financially healthy the state deems your business to be.

You can find the exact rate at which your business will need to pay UI tax, as well as whether you’ll need to pay estimated taxes, by using the Department of Labor’s Online Employer Services Portal

Federal Taxes

Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below are some of the main types your LLC may be required to pay for federal tax purposes:

Income Tax

By default, the IRS will not treat single and multi-member LLCs as separate entities from you for tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income tax on them at the personal rate of your tax bracket.

Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which changes how these taxes are levied in different ways.

Self-Employment Tax

In addition to income tax, members of single- and multi-member LLCs will need to pay self-employment tax on the share of the business’s profits that they report on their personal tax return at the end of the year.

This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.

Employment Tax

If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.

Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.

Excise Tax

If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.

Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.

How to File LLC Taxes in Delaware

Below, we’ve outlined the general process an LLC in Delaware will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in. 

Step 1: Gather Your Documentation

To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:

• You and your partner’s Social Security number, date of birth, and residential address
• The previous year’s tax returns
• Your LLC’s Employer Identification Number (EIN)

Then, you’ll need to gather all documentation related to your business’s income, such as:

• Invoices you’ve issued
• Sales transaction logs
• Electronic payment reports from services like PayPal or Stripe

Lastly, assemble all records pertaining to your business expenses, which should cover:

• Lease receipts for your business premises
• Bills for utilities
• Records of office supplies purchases
• Documentation of business-related travel
• Payroll records for employees

Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return. 

Step 2: Find The Right Tax Forms

Once you’ve gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:

• Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
• Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
• C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it’s a weekend or holiday.

• S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The deadline for filing taxes using 1120-S is March 15 or the following business day.

Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.

With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.

Step 3: File Your Taxes

The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:

• Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
• State and Local Tax Returns: Depending on the specific tax, the filing requirements can vary. You can pay most of your business taxes online using either Delaware One Stop or the Delaware Taxpayer Portal.

Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form. 

For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings. 

Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes. 

Keep Your Delaware LLC Compliant

While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant. 

Delaware LLC Annual Tax

Instead of the requirement to file an annual report, all domestic and foreign LLCs operating in Delaware must pay an annual tax of $300 by June 1. Your LLC will be required to pay this minimum tax regardless of how much income it generates as long as it remains active in the records of the Delaware Division of Corporations.

Keep in mind that while corporations in Delaware are required to file an annual report in addition to paying an annual report filing fee of $50, this reporting requirement is not imposed on LLCs taxed as C corporations.

If you fail to pay these annual taxes by the deadline, your LLC will need to pay a penalty of $200 (plus the initial $300) and 1.5% interest per month on the sum of these two amounts.

Note: You’ll need to pay this tax online using the Delaware Corporations Information System (DCIS) portal.

Licensure and Tax Requirements

In Delaware, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below, we’ve broken down three of the most common types your LLC may need:

• Delaware Business License: If you’re running a business or engaged in any kind of trade, whether as an individual or a Delaware corporation, it’s necessary to get a business license from the Delaware Division of Revenue. You can do this using the Delaware One Stop Business Licensing and Renewal service.
• Professional Licenses: In Delaware, certain professions must secure a license from the Division of Professional Regulation before starting their operations. This requirement covers a range of fields, including accountancy, architecture, engineering, and pharmacy, among others.
• Local Licenses: Specific counties and towns in your area might also need you to have local business licenses. It’s a good idea to get in touch with your local and county government offices to find out if there are any extra licensing requirements specific to your business’s location.

Note: For a full list of the statewide licenses and permits your LLC may need, refer to the list of state-regulated industries provided by Business First Steps.