You will be subject to Delaware withholding tax if you hire employees to work for your Delaware company (whether it is an LLC or corporation). As an employer, you need to withhold a certain amount from your employees’ salaries and pay it to the Division of Revenue for income tax purposes. You also need to file reports at different times.
The matter of Delaware withholding tax may get complex if you are still new to the state and its regulations. Hence, this blog will generally outline what you need to do in order to stay compliant with the requirements of such tax.
1. Overview of Delaware Withholding Tax
Delaware withholding tax is imposed on the compensations (wages or salaries) paid to employees (regardless of whether they are non-residents or residents) by a business that has an office or transactions in the state.
However, not all compensations are subject to Delaware withholding tax. Only the compensations paid for activities performed in the state are subject to such tax. These withheld amounts will be then submitted to the local authority for income tax purposes.
This means, as an employer, you have to withhold an estimated amount from your employees’ salaries or wages if:
- Your company has an office or conducts business in Delaware, and
- Those wages and salaries are paid for services performed in Delaware and taxable in the state.
You will subsequently pay the withheld amount and file a return to the Division of Revenue for income tax purposes. And for the convenience of assessment and collection, Delaware considers any amount of tax withheld from employees as the tax of the employers.
As for the payment and filing time, it will depend on the “lookback” method, which will be discussed right after.
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2. Payment and filing time for Delaware Withholding Tax
You will pay Delaware withholding tax and file reports upon one of the following time bases: quarterly, monthly, or eighth-monthly. Each basis will have different due dates and return forms.
– Quarterly basis: the due date is the last day of the month following the end of a quarter. You will need to file a Form W-1Q (Delaware tax withholding form).
– Monthly basis: the due date is the 15th day of the month following the end of a month. You will need to file a Form W-1.
– Eighth-monthly basis: each month has 8 payment periods that respectively end on 3rd, 7th, 11th, 15th, 19th, 22nd, 25th, and the last day of the month. The due dates are the 3rd day after the end of each payment period (exclusive weekends and holidays). You will need to file a Form W-1A.
The question of “which payment schedule your company will follow” depends greatly on the amount of withheld tax. The more amount, the more frequently you will need to pay and file reports.
|Basis||The withheld amount|
|Quarterly||No more than $3,600|
|Monthly||More than $3,600 to $20,000|
|Eighth-monthly||More than $20,000|
The withheld amount will be assessed in a “lookback period”. This “lookback period” is from 1st July to 30th June immediately preceding the targeted calendar year. For example, the “lookback period” for the year 2020 was from 1st July 2018 to 30th June 2019.
BIG NOTE: If your company is newly established and you hire new employees, you will have to pay Delaware withholding tax and file returns on a monthly basis until the next “lookback period”.
3. Computation of Delaware Withholding Tax
So, how do you know how much you are going to withhold from your employees? The simplest way is to use the withholding tax guide tables published by the Division of Revenue.
Nevertheless, you can self-calculate the Delaware withholding tax according to any approved method. The most common method is based on an annualized basis. Here are the steps:
– Step 1: Annualize a payment (multiply daily wage by 300 or monthly salary by 12 for example).
– Step 2: Offset the standard deduction (if any) against the annualized payment ($3,250 for a single employee or married employee who files a return separately from their spouse).
– Step 3: Compute the payable tax according to the Delaware personal income tax basis.
– Step 4: Multiply the number of the employee’s personal exemption (if any) by $110.
– Step 5: Offset the exempt amount (step 5) against the payable tax (calculated in step 4).
– Step 6: Divide the tax by the number of payroll periods in a year. Done!
Let’s have an example
Your employee, Annie, has a monthly salary of $1,000. Her annualized salary is $12,000. Offset the standard deduction of $3,250 against $12,000. The taxable income is now $8,750. According to personal income tax rates, her payable tax is $212.25. Since she has 1 personal exemption, subtract $110 from $212.25. The amount is $102.25. Divide that by the number of payrolls (12), you will need to withhold around $8.5 per month from her salary for Delaware withholding tax.
4. How to Stay Compliant with Delaware Withholding Tax
Now, you got the concept of Delaware withholding tax. Here are your duties when hiring new employees.
4.1. Register for Delaware Withholding Tax
In order to withhold and pay taxes for your employees, you need to register with the Division of Revenue. The Delaware withholding tax registration can be done by submitting the form of Combined Registration Application (for business license and/or withholding agent).
You will have the identification number the same as your Federal Employer Identification Number, for withholding tax purposes.
4.2. Obtain W-4 Forms from Employees
When hiring new employees, you have to obtain a signed Federal Form W-4 from them. This form notes down the employees’ information, their allowances, and exemptions. It is the base for you to calculate the amount to be withheld from the employees.
Also, you will need to report new hiring to the Division of Child Support Services. The report has to be made no later than 20 days after new employment. You can submit the report (Federal Form W-4 included) by post or electronic filing.
4.3. Pay compensations and withhold taxes
At every payroll, you have to withhold taxes from your employees’ wages or salaries, according to the annualized basis or the guiding tables (which have already been discussed above).
You must file appropriate Delaware withholding tax forms and pay the amount upon the deadline according to your specific situation. If your company is freshly new, you must pay on a monthly basis and file Form W-1 to the Division of Revenue.
4.4. Issue Form W-2 to Employees
Prior to 31st January each year, you must issue a Form W-2 to each employee. This form will list down the total wages and the withheld amount of each employee in the previous year.
In case employment ends before such deadline, the form must be given to the employee within 30 days after the last payment.
4.5. File an Annual Reconciliation of Returns
Before 28th February each year, you must file a reconciliation of all monthly/quarterly/eighth-Monthly returns in the previous year. This can be done by filing Delaware Form W-3 to the Division of Revenue. You must also attach to such Form W-3 all copies of Forms W-2 issued to all employees.
4.6. File Form W-2 and 1099
You also need to file W-2 and 1099 forms (1099-MISC, 1099-NEC, or 1099-R) to the Division of Revenue. Generally speaking, Form 1099 NEC is used to report compensations paid to nonemployees, meanwhile, the other forms are used to report other payments (rather than salaries).
The Division of Revenue has just revised the requirements of filing these forms for the year 2021. You can read the details on their website.
You will pay Delaware withholding tax if your company pays compensation to employees for their performances in the state, regardless whether your company is an LLC or corporation. If your company is freshly established, you need to pay withholding taxes and file a return on a monthly basis.
By the end of February each year, you need to file a reconciliation of all withholding tax returns and submit it to the Division of Revenue. You must issue W-2 Forms to all employees and send copies of these forms along with the reconciliation report.
The matters of withholding taxes may extend to the Federal level. Things may get complicated at times. You are advised to consult professionals or your registered agents to stay compliant with both state and federal regulations.