Every employer in Maryland is responsible for withholding, depositing, reporting and paying state payroll taxes. The Maryland Department of Labor, Licensing and Regulation handles the collection of these taxes.
Payroll taxes are a burden for any business since they have a significant impact on a company's operational costs. That's why every business owner should have a good grasp of payroll taxes and how to calculate them! We've compiled everything you need to know about calculating Maryland payroll taxes for your small business in this guide. We'll cover:
- What are Maryland payroll taxes?
- Maryland Payroll Tax Registration
- How much is the Maryland income tax rate?
- Who needs to pay Maryland income tax?
- Maryland Payroll Tax Withholding and Filing Requirements
- Forms and Filing Requirements
- How do you calculate state taxes in Maryland?
- Maryland Unemployment Taxes (SUTA)
- Wrapping Up
- Key Takeaways
Employers in Maryland are subject to several payroll taxes and fees. This guide will break down the critical components of Maryland payroll taxes to ensure you're doing everything right for your employees and yourself.
This guide is intended for employers whose employees work within the state of Maryland. Employers with employees working in both Maryland and other states should look at a multi-state payroll tax guide.
What are Maryland payroll taxes?
Payroll taxes are taxes that employers withhold from their employee's paychecks and pay on the employees' behalf. The purpose of payroll taxes is to fund various government programs, such as Social Security and Medicare.
The exact amounts of withholding depend on tax laws and your employees' income levels. Generally, employers must withhold federal income tax from their employee's paychecks and pay it to the Internal Revenue Service (IRS). In some cases, employers also withhold state income tax from an employee's paycheck. However, this varies by state.
Maryland payroll taxes are the taxes withheld from your employees' wages. These taxes include federal, state, and local withholding as well as Social Security and Medicare contributions. Employers are responsible for calculating, collecting, and remitting these amounts to the appropriate tax agencies.
The tax rates for Maryland payroll are generally the same as those for federal payroll taxes, with two exceptions: unemployment tax rates and Maryland-only income tax withholding.
Maryland employers must fulfill additional reporting requirements that include filing new hire reports and wage statements. Paying your employees is only one aspect of running a successful business. You also have to pay your state, local and federal taxes.
Maryland payroll tax amounts vary by employee, but you'll need to pay federal tax, Maryland state income tax and a variety of social security and Medicare taxes. You'll also need to pay unemployment insurance, which is handled through the Maryland Division of Unemployment Insurance (DUI).
Maryland Payroll Tax Registration
Every new business with employees in Maryland must register for Maryland payroll taxes. The purpose of this step is to get a unique tax ID number for your company, which will be used as identification on all future correspondence with the state's Department of Labor, Licensing and Regulation (DLLR).
You can register online or by mail. The online option is the best choice if you want to get everything done quickly. If you prefer to mail in a paper form, you can request an application through the DLLR website.
When you apply, you'll need to provide your EIN (Employer Identification Number), which is also known as your Federal Tax ID Number. You can find it on your W-2 forms or look up your old EIN online through the IRS website.
In Maryland, there are several types of payroll taxes that must be paid. These include:
Withholding Tax: This tax is withheld from employee paychecks and remitted to the state on a monthly or quarterly basis. The rate is determined by the employee's wages and filing status as indicated on their W-4 form.
Unemployment Insurance Tax: This is a federal tax paid by employers on each employee's first $7,000 in wages annually. The current rate is 6% of taxable wages, and funds are used to pay unemployment benefits to employees who lose their jobs through no fault of their own. Employers are required to register with the MD Department of Labor, Licensing & Regulation (DLLR), even if they have no employees at the time.
Worker's Compensation Insurance Premiums: All employers with one or more employees must carry worker's compensation insurance, which covers lost wages and medical expenses for injured employees
How much is the Maryland income tax rate?
All Maryland employers must withhold state income tax from employee paychecks in addition to federal income tax. The state's personal income tax rates range from 2 per cent to 5.75 percent. Maryland's payroll taxes are high compared to other states, and the state also imposes a "county" tax on employee wages, which is actually a local income tax collected by the state.
Maryland has four income tax brackets, ranging from 2% to 5.75%. The state uses a progressive tax system, which means higher earners pay a higher rate.
Marylanders can choose between filing a single return or filing jointly with their spouse. In addition, they must decide whether to itemize deductions or take the standard deduction (a flat amount of money that reduces your taxable income).
Maryland requires employers to withhold state income tax from employee paychecks based on each employee's W-4 form. Employees who qualify for a certain number of withholding allowances will pay less in taxes throughout the year than employees who don't claim any allowance
The state's top marginal income tax rate of 5.75% is applied to all taxable income over $250,000 for single filers and $300,000 for joint filers. The first $1,000 of taxable income is taxed at a rate of 2 per cent. Income between $1,001 and $2,000 is taxed at 3 percent. Between $2,001 and $3,000 is taxed at 4 percent; between $3,001 and $100,000 at 4.75 percent; and over $100,000 at 5.75 percent.
While the federal income tax rate is a flat percentage for all incomes, state income taxes are calculated based on specific income brackets.
Who needs to pay Maryland income tax?
Maryland's income tax rates are among the highest in the nation. The state also charges income tax to non-residents who work in the state — but not on the same basis as most other states. This can lead to some tricky tax situations for small-business owners, such as independent contractors and LLC members who live in Maryland and work in a neighboring state.
Maryland's graduated income tax rate ranges from 2 per cent to 5.75 per cent of taxable income. These rates are applied to all residents, including individuals, LLCs, S corporations and partnerships. Non-residents only pay tax on the income they earn from Maryland sources, which is subject to a flat withholding rate of 4.75 per cent.
Maryland is an unusual state when it comes to payroll taxes. Its income tax is a flat rate, just like the federal government's — meaning you'll pay the same percentage of your income no matter how much you make. However, Maryland has a progressive income tax system, which means that people who make more money pay higher rates.
Maryland does not impose a separate state disability insurance (SDI) tax. Instead, its SDI program is funded by a portion of the UI tax payments employers make. Employees also do not contribute to their own SDI benefits.
Like all states, Maryland follows federal law that requires employers to provide workers' compensation insurance coverage to employees who are injured on the job or become ill due to work-related conditions.
Maryland Payroll Tax Withholding and Filing Requirements
Employers have a number of requirements regarding payroll taxes, including withholding and remitting state income taxes and paying unemployment tax. Maryland employers are also required to provide workers' compensation insurance.
Maryland's personal income tax law is similar to the federal tax law. However, there are some differences:
Maryland law allows taxpayers to claim personal exemptions for themselves and their dependents, but the dollar amount of each exemption is based on taxable income. The state also offers a standard deduction that's based on taxable income.
Non-residents who work in Maryland must pay state income tax on the wages they earn while working in that state. Residents who work in other states may be able to file a reciprocal agreement to avoid paying state income taxes in both states.
Forms and Filing Requirements
All employers must complete Form MW507, Employer's Annual Income Tax Withholding Reconciliation Return - For Calendar Year 2016, and file it by February 28. New employers must submit Form MW508, Application for Employer Identification Number (EIN) or Withholding Tax Account Number, to register with the state.
Employers are required to electronically file all returns, extension requests, amended returns, and wage reports through one of these services:
- Maryland Business Express (MBE) Online Services (for businesses who already have a user ID)
- Maryland iFile (for businesses who do not have a user ID)
- Maryland Revenue Administration System (MRAS) for use by Software Providers only
As an employer, you are responsible for collecting and remitting state income taxes from your employees. You must also withhold social security and Medicare taxes from employee paychecks.
How do you calculate state taxes in Maryland?
Maryland is one of the few states with a progressive withholding tax system, meaning that different rates are applied to different levels of income. The state also has an unusual setup for its unemployment insurance taxes. However, employers in the Old Line State can take advantage of free help offered by the state government to file and remit payroll taxes.
Maryland Income Tax Withholding
The state income tax rate for Maryland is 2%, but there are additional tax brackets for higher earners. This applies to wages, so it's only relevant if you withhold employee wages from their paychecks. If you don't pay your employees' wages, you won't need to worry about this withholding tax, as it's not a tax on business income.
This means that employers have to calculate how much they'll withhold from their employee's paychecks based on their total income. You can use the Maryland Income Tax Withholding Tables for Employers to determine what percentage to withhold. This table includes calculations for different numbers of allowances; these correspond to things like children or dependents and will be listed on a W-4 form filled out by each employee.
Calculating state payroll taxes in Maryland can be tricky. It's not enough to know the federal withholdings. You also have to know your state and local taxes.
Maryland payroll taxes are calculated in a different way than federal or other state income taxes. This is because Maryland follows a "formula-based method" to calculate state taxable wages. The Maryland Department of Labor, Licensing, and Regulation (DLLR) provides the formula.
The formula is:
(Wage × MDTaxRate) + (Wage × (1 – MDTaxRate)) × (Federal Income Tax Withholding Rate) = Total State Tax Withholding
Wage = Employee's Gross Wages
MDTaxRate = Maximum Maryland State Tax Rate of 3.20 %
Federal Income Tax Withholding Rate = Applicable federal income tax withholding rate
Maryland Unemployment Taxes (SUTA)
Maryland's unemployment taxes are a major factor in determining the state tax rate for Maryland employers. The Maryland unemployment insurance program is funded through employer contributions, not employee contributions. SUTA rates vary by employer.
Maryland unemployment taxes are imposed on employers who pay their employees on a regular basis through wages, salaries, commissions or bonuses. For example, an employer who pays its managers $100,000 per year in salary is subject to both state and federal unemployment taxes on this amount.
In addition to paying SUTA on the wages paid to each employee during the calendar year, employers must also pay SUTA on all of their employees' wages for that year that is being paid out at any time during that year. This includes wages paid by the employer in December or January after the beginning of the calendar year and also includes amounts that were paid before the start of the calendar year but were not reported as taxable wages until after January 1 of that year.
Because Maryland Unemployment Compensation taxes are based upon the total amount of taxable wages paid in Maryland during a calendar year, it is important that you keep accurate records of all taxable wages earned in Maryland during any one-year period.
If you work in Maryland, it's vital that you understand how payroll taxes work. There can be significant fines and penalties for employees who fail to comply with the law, and this consequence shouldn't be taken lightly. Fortunately, there are plenty of resources available to help you out. Take the time to learn about payroll tax deductions, exemptions, and rates—that way, you'll never risk incurring a penalty.
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Payroll tax is a necessary evil that every employer must abide by. The information found herein will aid in the process of ensuring proper payroll taxes are being paid on each employee, but there is always some uncertainty as to how long these laws will remain unchanged. As always, any changes to these laws can and should be followed closely so that compliance is maintained between you, your employees and the appropriate government agencies.
This guide walked you through how to handle withholding and reporting requirements, including:
- Maryland income tax withholding
- Maryland payroll taxes
- How to register your business with the state
- How to file and pay Maryland payroll taxes
In Maryland, employers are required to pay both state and federal payroll taxes. These payroll taxes include Federal Income Tax (FIT), Social Security and Medicare taxes, and State Unemployment Insurance Tax. Employers must also withhold the employee's share of Social Security and Medicare tax from their paycheck.
In addition to the above taxes, employers may need to withhold local income tax, depending on the city where the business is located. Employers will also need to pay a portion of unemployment insurance taxes and worker's compensation insurance premiums.
For Maryland payroll taxes, employers must pay the following:
- Federal Unemployment Tax Act (FUTA) tax
- Maryland Unemployment Insurance tax
- Maryland Disability Insurance tax
- Maryland Personal Income Tax Withholding
- Federal Income Tax Withholding