The Complete Guide To Maryland Payroll & Payroll Taxes
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.
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.
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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.
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.
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.