Delaware Contractor Taxes and Licensing: What Trades Need to Know

Delaware has no sales tax, so you don't charge customers tax on labor or materials. Instead, every contractor pays a gross receipts tax of 0.6472% on construction receipts above $100,000 a month, with no deduction for labor or material costs. You also need a Division of Revenue business license and Department of Labor contractor registration.

What's unusual about contracting in Delaware?

You won't add sales tax to an invoice here. Delaware's Tourism Office advertises "tax-free shopping," and the Division of Revenue says its gross receipts tax "is levied on the seller of goods or services, rather than on the consumer." For contractors, that tax hits the top line: the Division's contractor tax tips say gross receipts include "all sums received for any work done or materials supplied" on real property in the state.

Paperwork is the other surprise. A Delaware contractor typically needs a business license from the Division of Revenue, a separate contractor registration with the Department of Labor, proof of workers' comp for both, and, if based out of state, a bond. Crews coming from Pennsylvania, Maryland or New Jersey face all of these before the first day on site.

Do you charge tax on labor in Delaware?

No. With no sales tax, neither your labor nor your materials get a tax line on the customer's bill. What you owe instead is the contractor gross receipts tax, set by Title 30, Chapter 25 of the Delaware Code at 0.6472% of aggregate gross receipts. The Division of Revenue's current rate table lists the same rate for contractors (business code 331), developers, nonresidents and construction transportation contractors.

How the math works, per the statute and the Division's tax tips:

• Monthly filers deduct $100,000 of receipts each month and file by the 20th of the next month.
• Quarterly filers deduct $300,000 a quarter. The statute puts you on quarterly filing if your lookback-period taxable receipts don't exceed $1,500,000, a threshold that's adjusted annually. New licensees start quarterly.
• Payments to licensed subcontractors come off your gross receipts when there's a written agreement stating the sums. Report them on Form 1280.
• Nothing else comes off. The Division says there are no deductions for material or labor costs, equipment rental, hauling or similar expenses.

Because it isn't a sales tax, the labor-vs-materials split that drives pricing in other states doesn't apply here. For how other states draw that line, see sales tax on labor vs. materials.

What about materials you buy in other states?

Delaware has no resale or capital improvement certificate for you to hand a supplier, because there's no sales tax to exempt. The question is the seller's state. Maryland, for example, says in its Business Tax Tip #18 that if you buy materials in Maryland for a real property contract in another state, you pay Maryland's 6% sales tax and may apply for a refund only if the purchase wouldn't have been taxable where you used it. Pennsylvania suppliers follow Pennsylvania's rules. Read use tax for contractors before you set up supplier accounts across the line.

Which licenses do Delaware contractors need?

Delaware doesn't test general contractors, but it does make every contractor register twice. Under Title 30, the Division of Revenue issues a contractor business license for a $75 fee, renewed every year, and you need it "prior to, or in conjunction with, the execution of a contract." It won't issue the license without a workers' comp certificate. Separately, Title 19, Chapter 36 says "a contractor must register under this chapter before performing construction services or maintenance" with the Department of Labor's Office of Contractor Registration. That law defines construction services broadly, including landscaping and tree cutting.

DOL registration costs $200 for the first year, $200 for the second, then $300 for a two-year registration once you've had two consecutive years. Contractors with a state contract pay $300, $300 and $500. The application asks for proof of Delaware workers' comp. Knowing violations carry civil penalties of $5,000 to $85,000 each. Building permits and any local business license come from your city or county, so call before you start. See contractor licenses for how this compares nationally.

Nonresident contractors have extra steps. Title 30 § 375 requires a bond of 6% of the contract price on contracts of $20,000 or more, or 6% of the total when two or more contracts in one calendar year add up to $20,000. The bond secures payment of Delaware income taxes, license fees, unemployment contributions and withheld taxes. And anyone who hires a nonresident contractor or sub must report it to the Department of Finance on Form 5060 within 10 days, or face a civil penalty of up to $10,000.

How does Delaware tax contractor income?

The Division of Revenue describes personal income tax rates "ranging from 2.2% to 5.55% for income under $60,000, and 6.60% for income of $60,000 or over." A single-member LLC that's disregarded federally reports on Schedule C with the Delaware resident return (Form PIT-RES). Multi-member LLCs are partnerships by default and file Form PRT-RTN.

Corporations pay 8.7% on federal taxable income apportioned to Delaware. The Division says Delaware "recognizes the federal S election and does not impose corporate income tax on pass-through income," though S corps still file Form SCT-RTN. We found no pass-through entity tax election on the Division's pages, so ask your CPA.

Entity fees are separate. The Division of Corporations says Delaware LLCs, LPs and GPs owe a $400 annual tax by June 1. Corporations file an annual franchise tax report by March 1, with a minimum tax of $175 (authorized shares method) or $400 (assumed par value capital method) and a $50 report fee for non-exempt domestic corporations. Delaware charges a penalty on late estimated income tax payments; check with the Division for current thresholds and dates. To plan payments, use the quarterly estimated tax calculator and read quarterly estimated taxes for contractors.

When do you need workers' comp in Delaware?

Once you have one employee. Title 19 § 2306 applies the workers' comp law to "any employment in which 1 or more employees are engaged." Sole proprietors and partners aren't covered unless they elect in. Up to 8 stockholder-officers of a corporation, or 8 LLC members, can be exempted by written agreement.

Construction is stricter. Under § 2311, any licensed contractor or subcontractor is deemed an employer, and independent contractors working for licensed contractors are covered. The officer exemption shrinks to 4 executive officers, and sole proprietors or partners working as independent contractors can't rely on the general exclusion. Collect a certificate of insurance or notice of exemption from every sub and keep it for 3 years. The Office of Workers' Compensation in the Division of Industrial Affairs runs the program and offers an employer coverage lookup. More in workers' compensation.