Since the 1960s, Wilmington, Delaware has had a local wage taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of 1.25%, on top of federal and state income taxes, making it one of the cluster of cities with a local income tax. Earlier this year, Wilmington officials extended the wage tax to non-income distributions by S corporations.
S-corporations are small (fewer than 100 shareholders) “pass-through entities,” meaning the S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). itself pays no corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . Instead, the employee-shareholders of the S corporation pay the taxes as individuals. The S corporation therefore divides all its income into two buckets: employee wages and shareholder distributions. The former are fully subject to payroll and income taxes; the latter less so. (Congress has extended payroll taxes on distributions somewhat for professionals, and has toyed with fully extending it.)
Wilmington thus now requires that its local wage tax be paid both on the “salary” and the “distribution” parts. The New Castle County Chamber of Commerce has unsuccessfully tried to get the city to reconsider, and now says it will go to the state legislature:
“The city needs to do this correctly,” chamber President Mark Kleinschmidt said. “They shouldn’t be expanding the definition of the wage tax.”
Mayor James M. Baker’s chief of staff, William S. Montgomery, said he was “extremely disappointed with the county chamber’s statements and actions.”
“We met throughout the summer with them to discuss these issues, but the truth is, they brought absolutely no constructive ideas to the table,” Montgomery said. “Instead, they choose to defend individuals who earn $1 million yearly and only pay taxes on what a person earning $30,000 yearly would pay. That is simply not fair.”
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