Maryland payroll taxes include federal, state, and even local taxes and payroll labor laws. Here's a complete breakdown of which payroll taxes your Maryland business has to pay.
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Maryland payroll taxes can be complicated. Maryland small business owners have to pay federal, state, and even local payroll taxes. There are also several HR labor laws and payroll policies that businesses have to follow. Here’s a complete breakdown of Maryland’s payroll taxes so you can rest easy knowing your business is compliant with the latest laws.
State Payroll Taxes in Maryland
In addition to federal payroll taxes, Maryland has its own unique set of payroll laws and regulations that small business owners should be aware of.
As a small business owner, there are several taxes you are liable to pay. Let’s take a look at which of these taxes apply to payroll in Maryland.
Maryland Income Taxes
Maryland utilizes a progressive income tax ranging from 2% to 5.75% depending on income. Also, the state’s 23 counties and the City of Baltimore impose separate income taxes, ranging from 2.25% to 3.2% depending on location. These taxes must be withheld by employers.
Maryland Supplemental Income Tax
Additional income such as bonuses, severance pay, and commissions are subject to a supplemental tax with rates of 3.2% to 8.95%.
Maryland Property Taxes
These taxes are determined by your local government and are not accounted for in payroll.
Maryland Sales Tax
Generally speaking, Maryland levies a 6% sales tax on most purchases (alcohol carries a 9% sales tax). This tax does not apply to payroll, but needs to be paid quarterly through the bFile system.
Learn more about how sales tax works in our complete guide.
Getting A Maryland CRN Number For Your Business
Any employer in Maryland must register to obtain a Central Registration Number (CRN) from the Maryland Comptroller. In doing so, small businesses can simultaneously register for income withholding and unemployment insurance taxes through the state’s Combined Registration Application. Before getting started though, you’ll need to get a Federal Employer Identification Number (FEIN).
Maryland Payroll Tax Exclusions & Exemptions
Under Maryland labor and tax laws, some forms of payment, types of employment, and employee characteristics can override withholding requirements. Some possible exemptions include the following:
- Domestic service in a private residence, including a college club, fraternity, or sorority.
- Any duties conducted by an ordained and licensed minister in service of a religious order.
- Employees engaged in foreign maritime trade within the ports of Maryland.
- Single and student employees with income less than the minimum filing requirements:
- Weekly: $234.62
- Biweekly: $469.23
- Semi-Monthly: $508.33
- Monthly: $1,016.67
- Annual: $12,200.00
Employers can follow a certificate of exemption, also known as form MW507, as a guide. This form authorizes an employer to withhold income tax and any exemptions claimed by the employee when filling it out. In the event an employee’s earnings exceed $100,000 (if filing alone) or $150,000 (if filing a joint income tax return), they must recalculate their number of exemptions.
Meanwhile, payment to independent contractors qualifies as an exclusion in Maryland, meaning that it is income that is not subject to taxes. Independent contractors are liable for paying their own income taxes. To ensure that an independent contractor does not qualify as an employee, they must meet the following criteria:
- The individual is free from control and direction over their performance within the contract.
- The individual customarily is engaged in an independent business or occupation of the same nature as that involved in the work.
- The work is (a) outside of the usual course of business for whom the work is performed or (b) performed outside of any place of business of the person for whom the work is performed
Maryland Labor Laws & Other HR Requirements
In addition to payroll taxes, employers in Maryland have specific labor laws and HR laws that affect payroll that must be followed. Here are the Maryland labor and payroll policy laws that your business needs to know.
Maryland's Minimum Wage
Maryland has a minimum wage of $12.50/per hour and isone of a growing list of states with minimum wages exceeding the federal rate of $7.25.
Furthermore, Maryland law requires that employers visibly display posters with minimum wage and overtime laws or else be subject to $1,000 fine.
Minimum wage can vary by county in Maryland as well.
Small businesses in Montgomery County should be aware of several changes. First off, employers with just one employee are now subject to the county’s minimum wage.
- Businesses with 10 or fewer employees: $14.00
- Businesses with 11-50 employees: $14.50
- Businesses with 51 or more employees: $15.65
These rates are slated to increase again in 2023.
Maryland Tipped Workers
Any employee earning more than $30 per month in tips must receive earnings in line with Maryland minimum wage hourly rates. However, employers can apply a tip credit for all but $3.63 of the hourly rate.
If a tip credit is used, those employees must receive a printed or electronic wage statement each pay period in addition to pay stubs and paychecks. This statement outlines an employee’s hourly rate and breaks down the allocation of tips between credited hours and additional cash wages.
Maryland Unemployment Tax
For 2020, Maryland’s unemployment tax rate ranges from 1% to 10.5%. The rate is calculated according to the ratio of an employer’s experience with benefit charges and taxable payroll over the past three fiscal years ending on June 30. Essentially, “experience” refers to whether a business has had any employees make claims for state unemployment benefits in the past.
If this is your first year in business, your unemployment tax rate is an automatic 2.3%.
These rates can vary annually, so keep an eye out for updates.
Maryland New Hire Reporting
In most cases, hiring a new employee or rehiring a former employee after a 90-day unpaid absence will need to be reported to the Maryland State Directory of New Hires. Some notable exceptions include hiring immediate family members and employees earning less than $1,000 in a quarter.
You’ll need to report the following information for any new hire or rehire who doesn’t meet these exceptions:
- Your Federal Employer Identification Number (FEIN)
- Your business name
- Your business address
- Your business’s Maryland Unemployment Insurance Number
- The employee’s full name
- The employee’s address
- The employee’s Social Security Number
- The employee’s first day of work
- Medical insurance availability
- The employee’s salary and pay frequency
As an employer, you have 20 days to report a new hire at your small business. Failing to do so could result in fines up to $500 per unregistered employee. Beyond the fees, reporting is important to mitigate fraudulent unemployment insurance claims and establish child support orders.
Maryland PTO Policy
Maryland PTO policy differs based on the number of employees. Employers with 15 or more employees must provide paid sick and safe leave for certain employees. Since 2018, eligible employees accrue at least one hour of paid sick leave per 30 hours of work. However, accrual is capped at 40 hours per year and 64 hours in total. Employers are responsible for updating employees with statements showing their available sick and safe leave.
Meanwhile, employers with 14 or fewer employees are required to grant unpaid sick and safe leave for certain employees.
Eligible reasons for leave include:
- Caring for or treating the employee’s mental or physical illness, injury, or condition
- Obtaining preventative medical care for the employee or their family member
- Caring for a family member with a mental or physical illness, injury, or condition
- Maternity or paternity leave
- Obtaining medical or health services, legal proceedings, or relocating residence related to instances involving domestic violence, sexual assault, or stalking against the employee or their family member
Employers in Montgomery County must abide by separate PTO legislation. The key difference is that annual accrued sick leave can reach 56 hours instead of 40, and that employers with fewer than five employees are only required to provide 32 hours of paid sick and safe leave (plus an option for 24 hours of unpaid leave).
Maryland Labor Laws
Maryland’s Healthy Employee Act, also referred to as the Shift Break Law, provides stipulations for employers to provide breaks for employees in certain scenarios. Notable exceptions include the following:
- Employees covered by a collective bargaining agreement with shift breaks that equal or exceed Maryland laws
- Employees exempt from overtime pay under the Fair Labor Standards Act
- Employees working at least four consecutive hours at a business location with five or fewer employees.
Eligible employees should be allocated the following break times per hours worked:
- 4-6 consecutive hours: 15 minute break
- More than 6 consecutive hours: 30 minute break
- 8 or more consecutive hours: 30 minute break plus a 15 minute break for every additional 4 consecutive hours worked
Generally speaking, a 15-minute break should constitute paid time under the Fair Labor Standards Act, whereas employers are not required to pay employees during 30-minute meal breaks.
Maryland Child Labor Laws
Maryland requires minors ages 14-17 to obtain work permits to legally work. The state also regulates the duration and type of work they may perform.
Any 14- or 15-year old employee may not work more than four hours daily or 23 hours weekly during the school year. When school is out of session, this increases to eight hours daily or 40 hours weekly.
Guidelines for 16- and 17-year old employees are a bit more complicated. For instance, they cannot spend more than 12 combined hours at work and school in a given day. They must also be allowed eight consecutive hours of free time between school and work obligations. Finally, they cannot work more than five hours straight without a 30-minute break at minimum.
Additionally, minors may not be employed in industries involving hazardous materials and heavy machinery, such as mining and meatpacking.
Maryland Payment Obligations
Maryland has legislation regulating the frequency employees are paid, but there is some flexibility. Employers can follow a weekly, biweekly or semimonthly pay period, though monthly can be possible in certain scenarios. If a payday coincides with a holiday, employers need to pay their employees on the last preceding business day. Employees have the right to be paid in cash, check, or direct deposit depending on their preferences.
In the event that an employee is fired or quits on their own accord, employers are responsible for paying them by the next scheduled payday. It’s also worth noting that Maryland does not require employers pay employees for unused sick or vacation leave if terminated.
Disability Insurance In Maryland
Employers in Maryland do not have to offer disability insurance unless they have 15 or more employees. These large employers must comply with the Americans with Disabilities Act, which is a federal requirement rather than a state mandate.
Worker's Compensation Insurance In Maryland
Any employer in Maryland with one or more employees is required to provide worker’s compensation insurance for their employees. This insurance covers costs related to employee injuries that occur while working. Employers may not deduct a portion of the cost from insured employee’s wages.
In Maryland, employers may purchase worker’s compensation insurance from an appropriately licensed private insurance company or the non-profit Chesapeake Employers Insurance Company. It’s also possible to apply to become self-insured as an employer.
How To Do Maryland Payroll In 6 Steps
Now that we’ve covered Maryland’s various taxes and regulations, it’s time to tackle payroll for your small business employees.
Step 1: Make Sure You’re Following All Maryland Payroll Laws
Making sure you’re in compliance with the aforementioned Maryland labor laws and regulations is an important first step before completing payroll. Otherwise, you could leave yourself liable to fines, misdemeanors, and criminal charges.
- Failing to obtain worker’s compensation insurance can result in a fine up to $10,000.
- Any employer who fails to file income tax returns or remit amounts collected as required is subject to a penalty up to 25% of the unpaid tax.
Step 2: Have the Proper Employee Documentation
Now that they meet the regulations, to process payroll, Maryland business owners will need to make sure they have the proper documentation for their employees (i-9s, W-4s, etc.).
Once you’ve double-checked that your business is abiding by Maryland labor laws, it’s time to compile key employee documentation to get started with payroll.
Maryland Payroll Forms
- I-9: This form is used to verify an employee’s identity and eligibility to work in the U.S.
- MW507: This form designates how much employers should withhold from employees for Maryland and local income taxes.
- W2: This form is a wage and tax statement that employers must send to employees and the IRS at the end of the year.
- W4: This form must be completed by new employees and returned to their employers to ensure their first paycheck is accurate.
Step 3: Calculate Your Employee’s Pay
If your small business has just a few hourly employees, calculating employee pay yourself may be a feasible and cost-effective option. Remember that you’ll need to account for tips, commission, PTO, and overtime if applicable in addition to salaries and hourly wages.
If you’re strapped for time or have many employees, there are options for small business payroll software that can streamline the process.
Step 4: Deduct Federal & State Payroll Taxes
Next they’ll need to deduct federal and state payroll taxes. Use a bullet point list to recap each item they’ll need to deduct (FUTA, state income tax, unemployment, etc.)
After you’ve calculated employee gross pay, you’ll need to make the appropriate deductions for federal and state payroll taxes. There is a lot to remember here, so consider keeping the following list handy to make sure you don’t omit anything.
- Federal Income Tax: An employee’s W4 information will determine withholdings.
- Federal Unemployment Tax: As of 2020, a tax rate of 6% applies to an employee’s first $7,000 in annual wages. Thus, this tax is capped at $420 per employee.
- Social Security: A flat tax rate of 6.2% for wages up to $137,700 in 2020.
- Medicare: A flat tax rate of 1.45%, though employees earning more than $200,000 receive an additional 0.9%
Maryland Payroll Taxes
- State Income Tax: Statewide rate between 2-5.75% depending on income, plus a flat county or city tax rate of 2.25-3.2% depending on location.
- Supplemental Income Tax: Ranges from 3.2% to 8.95% on bonuses, commission, and severance pay.
- Unemployment Tax: Ranges from 0.3% to 7.5% and applicable to the first $8,500 in wages.
Step 5: Process Payroll
Taking out deductions and withholdings from employees’ pay leaves you with their net pay, which is the dollar amount that will appear on their paycheck. Payroll software can help with this stage of the payroll process too by printing checks and making direct deposits.
Step 6: Don’t Forget To Keep Records
Processing payroll to pay employees on time is important, but you’re not out of the woods just yet. You’ll need to submit payroll records to Maryland’s Revenue Administrative Division and IRS, so it’s worth creating a system to save relevant information and documentation. For instance, you’ll want to keep track of employee information and their earnings, even if they are fired or quit.
Maryland requires employers to submit payroll information electronically via the Employer Payroll Data Reporting Application. At the beginning of each fiscal year, be sure to submit the contact information for all parties responsible for completing payroll to the Maryland State Retirement and Pension System (MSRA).
Maryland Payroll Tax & Business Resources
There are a lot of factors to keep in mind when it comes to completing payroll in Maryland. Rest assured that practice and creating a system that works for your small business will help you stay on top of your payroll obligations. Another great trick to simplifying payroll taxes and payroll calculations is to get small business payroll software.
For more Maryland business resources, check out our top Maryland small business loans to get your business the financing it needs.
FAQs About Maryland Payroll Taxes
What is the payroll tax rate in Maryland?
Maryland employers have to pay the federal payroll tax rate of 7.75% as well as withholding income tax. Maryland business also have to charge sales tax and pay several other local payroll taxes.
Does Maryland have local payroll taxes?
Maryland does have local taxes, so you will want to check with the Comptroller of Maryland for the most accurate information for your small business.
Does Merchant Maverick have a Maryland payroll calculator?
Merchant Maverick currently does not have a Maryland payroll calculator, but we love rolling out new tools and resources for small business owners! If you want to see a payroll calculator, please let us know in the comments below.