How to File LLC Taxes in Delaware? (Most Efficient Method)
Following the incorporation of your Delaware LLC, paying taxes to the Corporation Division and the IRS is a crucial aspect of managing your company.
To help you get started, we worked with our team of business lawyers and advisors who have been in the LLC industry for over fifteen years.
We spent the past four weeks reviewing the Delaware Corporations Division and the Department of Revenue for the correct and updated LLC tax requirements.
Here's a detailed guide on the basics of filing Delaware LLC taxes.
Quick Summary
- All LLCs in Delaware must pay an annual franchise tax of $300.
- Delaware LLC owners must submit self-employment taxes of 15.3%.
- LLCs that are taxed like corporations are subject to an 8.7% corporate income tax.
How Are LLCs Taxed in Delaware?
LLCs are taxed in Delaware as pass-through entities. The entity does not pay taxes by itself; the members file personal taxes on the LLC’s profits or dividends.
The number of members an LLC has also affects how the IRS will tax it; a single-member LLC is taxed like a sole proprietorship, while a multi-member LLC is taxed like a partnership.
Alternatively, you can select your LLC with the S or C Corp status. If an LLC elects to be classified as a corporation, it would then be liable for Delaware's corporate income tax.
State Taxes for Delaware LLCs
The taxation structure of the entity determines state taxes for Delaware LLCs. Here's how different LLCs are taxed in Delaware.
1. Single-Member LLCs
The U.S. Internal Revenue Service automatically designates an LLC with a single member as a "disregarded entity."
The LLC is dismissed for taxation reasons and does not prepare or submit a tax return.
Therefore the LLC’s profits are reported as self-employment income. This indicates that similarly to a sole proprietorship, the business's owner must record all earnings and losses with their personal Delaware income tax return.
2. Multi-Member LLCs
By default, the Internal Revenue Service will treat an LLC with more than one member as a partnership for tax purposes.
The LLC is not liable to federal taxation on any revenue or loss due to partnership taxation. Instead, the LLC's profit or loss is distributed to each member according to their distributive share.
Each shareholder reports their portion on their personal taxes and pays self-employment tax at their personal income tax rate, considering the amount of revenue or loss passed through to the shareholder (owner).
Read our article and learn more how is multi-member LLC taxed.
3. LLCs Taxed as S-corp
By submitting Form 2553, electing LLC tax status under Subchapter S (S-Corp taxation), an LLC might choose to be taxed as a pass-through corporation [1].
The LLC is not taxed as an entity under S-Corp taxation; rather, the members include all items of revenue and loss on their personal tax returns, and the LLC passes along the nature of the income to the members.
"To qualify for an S-Corp selection, an LLC must have 100 US-based beneficial owners at most."
- Behzad Gohari, LLC Lawyer
4. LLCs Taxed as C-corp
A C-Corp is viewed as being distinct from its owners or members.
The members (owners) of an LLC that chooses C-Corp taxation are subject to double taxation, which means that the LLC is taxed on its revenue and losses at the LLC level and that the members are taxed on any distributions the LLC makes.
If an LLC elects to be classified as a corporation, it would then be liable for Delaware's corporate income tax, indicating the tax implications that arise from the choice of tax classification.
These Delaware LLC taxes are computed using your income at the corporation tax rate of 8.7%.
Distributions from an LLC choosing C-Corp taxation are either distributed to the members (owners) as ordinary income or are considered as qualified dividends, which are taxed based on the capital method at a rate of 0%, 15%, or 20% subject to the marginal tax bracket of the benefiting member.
Federal Taxes for Delaware LLCs
The Delaware Division of Corporations levies various federal taxes for limited liability companies operating there.
These taxes include the following:
1. Delaware State Income Tax
A Delaware LLC must pay a $300 yearly tax to the Delaware Division of Corporations due on or before June 1st of each year. You can file online and pay the franchise tax on the Delaware Corporations Information System.
Delaware doesn't levy income tax directly on LLCs.
However, to declare their revenue to the state, all LLCs that file their federal taxes as partnerships must submit Form 300 to the Delaware Division of Revenue. Similarly, a Delaware LLC filing as an S-corp must use Form 1100S to declare revenue [2].
The minimum tax for corporations in Delaware varies based on the method of calculation, with the Assumed Par Value Capital Method setting specific minimum tax amounts.
Under certain methods, the maximum tax can reach up to $200,000.00, or $250,000.00 for large corporate filers.
Delaware's progressive personal taxable income rates range from 2.2% to 5.55% on income exceeding $2,000 but under $60,000.
Those earning more than $60,000 annually pay a maximum rate of 6.6%.
Find out more about Delaware LLC tax due dates.
2. Federal Self-Employment Tax
Delaware's federal self-employment tax rate is 15.3% covering Medicare and Social Security.
As an employer, you're also responsible for submitting the federal income tax withholding and the state income tax withholding.
Other Taxes
Apart from the standard federal and state taxes, your Delaware LLC might be subject to these other taxes.
1. Gross Receipts Tax
Although there is no sales tax in Delaware, there is a gross receipts tax that applies to all companies that sell physical and intangible items and services.
The gross receipts tax rates range from 0.0945% to 0.7468% based on what your company offers.
The frequency of your tax reports will depend on how much money your company generates. All companies are originally put on a quarterly repayment plan by default.
After analyzing your business operations, the Division of Revenue will decide whether you stay on the quarterly schedule or switch to a monthly one.
See our article for more information on how to file LLC quarterly taxes.
2. Unemployment Insurance Tax (UI)
Employers must pay unemployment insurance tax in Delaware on the first $18,500 of an employee's salary.
The range of UI tax rates is 0.3% to 8.3% for operating businesses, but if your entity is new, you'll pay 1.8%.
We recommend using the Online Employer Services Portal to determine your specific rate after registering with the Department of Labor.
3. Workers' Compensation
Businesses in Delaware with one or more employees are obliged by law to offer workers' compensation insurance to their employees.
The cost of workers' compensation differs according to the degree of risk associated with your employees' tasks and the frequency of your claims.
It's good that the Delaware Insurance Plan offers comprehensive coverage for LLCs that cannot obtain insurance from private insurers.
4. Local Income Taxes
Different local municipalities in Delaware collect local income tax. For example, if you live or conduct business in the city of Wilmington, you must pay local taxes of 1.25% of your income.
Related articles:
- How to Create an LLC in Delaware
- How to Look Up an LLC in Delaware
- Premium LLC Formation Services in Delaware
5. Industry Taxes
The Division of Revenue in Delaware charges different taxes depending on the industry your LLC operates.
You'll pay industry taxes if your Delaware LLC is under any of these sectors:
- Occupancy tax
- Realty transfer tax
- Cigarette/tobacco tax
- Alcoholic drinks manufacturer's tax
- Gas and oil wholesaler's tax
What is Tax-Deductible for an LLC in Delaware?
Tax-deductible for an LLC in Delaware includes child and dependent care, earned income tax credit, and volunteer firefighters credit. It is also necessary for foreign corporations to file an annual report with the Delaware Secretary of State.
Other tax-deductible for Delaware LLCs include the following:
- Personal Credit: Available for married individuals filing separate returns and those over 60.
- New Economy Job Credits: New employers who hire 50-200 employees can claim 25% of the withholding tax.
- Research and Development Tax Credit: Aims to promote businesses venturing into new research in Delaware.
- Neighborhood Assistance Tax Credit: Offers capital for companies wanting to invest in communities with lower incomes and tax credits equal to 50% of the authorized investment amount, up to a maximum of $100,000 per taxpayer each year for up to three years.
- Individuals with Disabilities Tax Credit: Businesses that employ people from vocational rehabilitation centers are eligible for a 10% tax credit from the disability tax credit that can be used for their personal and corporate income tax, insurance, and bank franchise tax [3].
FAQs
Why Is Delaware a Tax Haven?
Delaware is a tax haven because it has no sales tax for domestic businesses that sell things. Foreign businesses in Delaware are exempt from state income tax and other property taxes.
Do I Need To Pay an Annual Tax for an LLC in Delaware?
Yes, you need to pay an annual tax for an LLC in Delaware. The Corporations Division levies a $300 franchise tax for all LLCs each year.
Do You Need Help Filing Your Delaware LLC Taxes?
Filing the Delaware taxes for your limited liability company can be daunting if you don't know what forms to file and the information to include.
This is why QuickBooks is a great tool for tracking your income and loss and reporting on tax forms. QuickBooks can automatically calculate the sales tax for swift and precise filings for you on the sales receipts and invoices.
By incorporating QuickBooks into your financial workflow, you can streamline the process of maintaining accurate records and staying compliant with tax regulations.
