If your small business has employees working in Delaware, you'll need to withhold and pay Delaware income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Delaware state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you'll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you'll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Delaware) issue separate state tax ID numbers. You'll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website, IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Delaware withholding tax account with the Delaware Division of Revenue (DOR). You set up your account by registering your business with the DOR either online or on paper. To register online, use Delaware's One Stop Business Registration and Licensing System. If you register online the DOR will assign you an account within 24 hours. To register on paper, use Form CRA, Combined Registration Application. If you register on paper the DOR should assign you an account within one week. There is no fee to register your business with the DOR for withholding tax purposes (other types of registration incur a fee).
All new employees for your business must complete a federal Form W-4. Due to the difference between federal and state deductions and credits, it may be necessary for an employee to claim either an additional number or a lesser number of withholding allowances for state purposes. In those cases, the employee must provide Form W-4 and indicate separately on the form the number of allowances claimed "for State of Delaware Purposes." To estimate the number of state withholding allowances, new employees may use Form SD/W-4A, Withholding Allowance(s) Computation Worksheet. (Non-resident employees should use Form W-4NR, Non-Resident Withholding Computation Worksheet.) You can download blank Form SD/W-4As from the business tax forms section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
In Delaware, there are three possible payment schedules for withholding taxes: eighth-monthly, monthly, or quarterly. Your payment schedule ultimately will depend on the average amount you withhhold from employee wages over time. The more you withhold, the more frequently you'll need to make withholding tax payments. New employers will file on a monthly basis. The DOR assigns payment schedules to established employers by using a lookback period.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
Here are the due dates for the various payment schedules:
If the payment is due on a Saturday, Sunday, or state holiday, payment is due on the next regular working day.
If paying by check, payments must be submitted with withholding forms. Eighth-monthly filers use Form W1A, monthly filers use Form W1, and quarterly filers use Form W1Q.
The DOR requires all employers who previously have had to file their federal withholding taxes by electronic funds transfer (EFT) to also file their Delaware withholding taxes by EFT. Check the EFT section of the DOR website or call the DOR's EFT Department for more information.
For more information on payments and returns, including calculating how much to withhold, check the online Employers Guide at the DOR website.
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you've withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 summarizing the employee's withholding for the year. Use Form W-3A/W2, Annual Reconciliation/Transmittal Form. Note: There is one version of this form for monthly and quarterly filers, and another version of the form for eighth-monthly filers. You must include copies of the W-2s sent to all of your employees working in Delaware with your annual reconciliation. Employers required to file W-2s electronically for federal purposes also must file W-2s electronically with their Delaware annual reconciliation. For information on electronic filing of W-2s, check the W-2 and 1099 reporting FAQs on the DRS website. The annual reconciliation is due by the last day of February.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it's easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Delaware employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.