The Complete Guide To Maryland Payroll & Payroll 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.

Additional income such as bonuses, severance pay, and commissions are subject to a supplemental tax with rates of 3.2% to 8.95%.

These taxes are determined by your local government and are not accounted for in payroll.

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.

A use tax can apply to goods purchased outside Maryland. This tax does not apply to payroll and must be paid quarterly by specific due dates.

Maryland has a minimum wage of $12.50/per hour and is one 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 a $1,000 fine.

Minimum wage can vary by county in Maryland as well.

Montgomery County

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.

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.

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 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’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:

1. Employees covered by a collective bargaining agreement with shift breaks that equal or exceed Maryland laws
2. Employees exempt from overtime pay under the Fair Labor Standards Act
3. 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 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 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.

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.

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.

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.

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.

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.