If your small business has employees working in Maryland, you’ll need to withhold and pay Maryland income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Maryland state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Maryland) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Maryland withholding tax account with the Comptroller of Maryland. You set up your account by registering your business with the Comptroller using Form CRA, Combined Registration Application. Once registered, you’ll receive a CR number from the state, which is the Maryland state equivalent of the EIN. You can submit Form CRA online, by regular mail, or by fax. If you register online through Maryland’s bFile system, you’ll receive a confirmation number immediately and your account information will be mailed to you quickly. You can download a copy of Form CRA from the business tax forms section of the Comptroller website. The downloadable version includes complete instructions including how to submit by fax or regular mail. There is no fee to register your business with the Comptroller.
All new employees for your business must complete both a federal Form W-4 and the related Maryland Form MW507, Employee's Maryland Withholding Exemption Certificate. You can download blank Forms MW507 from the business tax forms section of the Comptroller website. You should keep the completed forms on file at your business and update them as necessary.
In Maryland, there are five possible payment schedules for withholding taxes: accelerated, quarterly, monthly, seasonally, and annually. New businesses generally are assigned to file payments quarterly. However, your payment schedule ultimately will depend on the average amount you hold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments. A seasonal payment schedule requires special prior approval from the Comptroller and is not covered here.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time so you should check with the Comptroller at least once a year for the latest information.
Here are the due dates for the various payment schedules:
If the due date falls on a Saturday, Sunday, or state holiday, the due date is extended to the next business day.
The Comptroller may send you a booklet of preprinted coupons—also called withholding returns—to use when making payments (typically Form MW506). However, the Comptroller does not automatically do so, as it wants to encourage businesses to file electronically. You can make payments online through the Comptroller’s bFile system or pay via Electronic Funds Transfer (EFT).
The Comptroller provides several different methods for calculating how much tax to withhold. For more information, check the Maryland Employer Withholding Guide published by the Comptroller and available from the business tax forms section of the Comptroller website.
Many states at least nominally separate withholding tax payments from withholding tax returns. In Maryland, however, the payments and returns made through the course of the year generally are consolidated in Form MW506.
After the end of the year, you must file an annual reconciliation with the Comptroller that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 summarizing the employee’s withholding for the year. Businesses on an annual payment and reporting schedule still must file an annual reconciliation in addition to the annual report. Businesses are encouraged to file electronically. However, if filing on paper, use Form MW508, Annual Employer Withholding Reconciliation Return. You should attach copies of the federal W-2s sent to all of your employees working in Maryland. Employers with 25 or more employees must file electronically via one of several bFile methods or using magnetic media such as a CD. The annual reconciliation is due on or before the last day of February.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company. According to the Comptroller, employers are responsible for ensuring that tax returns are filed and deposits and payments are made, even if the employer contracts with a third party to perform these acts.
This article touches on the basic elements of Maryland employee withholding taxes. Under Maryland law, an employer may be held personally liable for certain unpaid taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.