Officials and Businesses in Wilmington Spar Over Wage Tax Expansion

Since the 1960s, Wilmington, Delaware has had a local wage tax 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 corporation itself pays no corporate 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.”

More here.