How Much Does An LLC Get Taxed in Delaware?

Delaware has long been hailed as the country’s incorporation state. With business-friendly laws and favorable tax regulations, it is no surprise that more than a million limited liability companies (LLCs) are registered in Delaware.

These entities are primarily known for their pass-through taxation, which means they do not pay income taxes themselves. Everything they earn and lose is passed through to their owners, who must report these amounts on their tax returns and pay taxes based on their personal income tax rates.

However, this does not necessarily mean that Delaware LLCs are tax-free. They may be subject to other state taxes, which could significantly affect their bottom line.

The Basics of LLC Taxes

By default, Delaware LLCs are taxed as pass-through entities, meaning they don’t pay income taxes themselves. Instead, their owners or members pay a 15.3% self-employment tax on the earnings they receive from the LLC. This setup allows them to avoid double taxation, potentially leading to significant tax savings.

This tax treatment is one of the primary reasons many entrepreneurs choose LLCs over other business structures like corporations. However, it’s important to remember that although Delaware LLCs have pass-through tax status, they are not exempted from paying state taxes.

Understanding the tax obligations of LLCs is crucial when considering establishing your business in Delaware. These obligations directly impact the amount of profits you take home, making it essential to be well-informed. 

How Much Does An LLC Get Taxed in Delaware?

There are three primary types of state tax Delaware LLCs pay:

Annual Franchise Tax

Delaware law requires LLCs to pay a $300 annual franchise tax regardless of their income and whether they conduct business within the state. This tax is due on or before June 1 and must be paid to the Delaware Division of Corporation.

If the LLC fails to pay this flat fee on time, it will be penalized $200.

Delaware Income Tax

As an LLC member, you must pay Delaware income taxes on your salary. Currently, the state’s graduated personal income tax rates range from 2.2% to 5.55% for incomes below $60,000 and 6.60% for incomes of $60,000 and above.

Here’s a comprehensive breakdown of the state’s rates:

These rates apply to both single and joint filers.

Gross Receipts Tax

Although Delaware doesn’t have sales taxes, it does impose a Gross Receipts Tax on all businesses that sell tangible and intangible goods and services.

This Delaware state tax rates range from 0.945% to .7468%, depending on the LLC’s business activities. The Delaware Division of Revenue’s Business Tax Tips page can help determine which rate will apply to your LLC. 

GRT returns are due monthly or quarterly, depending on your LLC’s income. But once your LLC’s operations start, it will have a quarterly payment schedule until the Division of Revenue reviews its activities and assigns a permanent arrangement.

Other Delaware LLC Taxes to Keep in Mind

Aside from the three primary state taxes we’ve discussed, Delaware LLCs may also have to pay for the following local Delaware taxes:

Local Taxes

Some municipalities in Delaware have additional local business taxes. For instance, Wilmington has a City Wage Tax that requires anyone working or living in the city to pay 1.25% of their gross wages.

Your Delaware LLC may also have to pay property taxes to its municipality if it has any properties.

State Employer Taxes

Once your Delaware LLC starts to hire employees, it will have to pay Unemployment Insurance and Workers’ Compensation taxes.

Employers in the state must pay UI tax on the first $18,500 of their employees’ salaries. The rate for this tax ranges from 0.3% to 8.3%, but if the LLC is a new employer, it will be 1.8%. 

As for worker’s compensation, it’s a state requirement for businesses with one or more employees. Unlike UI taxes, workers’ comp does not have a fixed rate. It varies depending on the level of risk your employees face on the job and your LLC’s claims history. 

Industry Taxes

The Delaware Division of Revenue collects additional taxes from LLCs in certain industries, such as:

• Alcoholic Beverages Manufacturer’s Tax.
• Cigarette/Tobacco Tax.
• Occupancy Tax.
• Petroleum Wholesaler’s Tax.
• Realty Transfer Tax.

Is Delaware The Right State For Your LLC?

Although Delaware has long been the country’s incorporation state, it’s not the right choice for everyone.

The state’s annual franchise tax for LLCs is set at a fixed rate of $300, meaning smaller businesses with lower revenues are subject to paying the same fee as larger entities with significantly higher revenues. This setup could put your LLC at a disadvantage, especially if it has a tight budget.

It’s also worth noting that Delaware’s GRT is levied on the company’s total revenues, not profits. Because of this, businesses with high sales volume and small profit margins end up with a higher tax burden.

So, is Delaware the right state for your LLC? The answer depends on your priorities. Delaware is perfect if you don’t mind paying more taxes in exchange for business-friendly laws. But if you want to reduce your tax liabilities and still enjoy the same pro-business policies, consider forming your LLC in states like Nevada and Wyoming.

These two states are known for having low taxes and favorable environments for smaller businesses. They have no state income taxes or franchise taxes for LLCs. Both jurisdictions also offer strong asset protection to LLC owners, which is crucial for protecting your personal assets from any liabilities the business incurs.

Ultimately, Nevada and Wyoming are the ideal alternatives if you want to pay as little taxes as possible.

Choose the Right State For Your Business

There’s a good reason why many of the country’s Fortune 500 companies are in Delaware, but this doesn’t mean that it’s the right state for your business. Remember, your needs and goals are different from them. So, it’s important to assess what matters most to you.

NCH can help you establish your business in a more tax-friendly state like Nevada or Wyoming.

NCH specializes in forming Nevada LLCs for tax optimization. Our business formation specialists will ensure your Nevada LLC is structured to lower your liabilities and maximize your tax savings.

To learn more, visit our website here or call us at 1-800-508-1729 to schedule a free consultation. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.