Payroll Tax Filing and Compliance in Maryland: What Employers Must Know

Nearly one in three businesses is penalized yearly by the IRS for payroll tax mistakes—often due to missed deadlines, incorrect calculations, or filing the wrong forms. Payroll compliance carries even higher stakes in Maryland because of added layers: local income taxes, state withholding rules, and complex filing categories. Whether running a small business in Baltimore City or managing remote employees across counties, the burden of accurate payroll tax filing and compliance in Maryland is yours to bear.

Maryland employers are responsible for calculating, withholding, and depositing state and local income tax from employee wages, based on where the employee lives—not just where your business operates. Add in quarterly withholding tax returns, federal income tax obligations, unemployment insurance taxes, and precise income tax reporting withheld, and it’s easy to see why payroll mistakes are common. Unfortunately, those mistakes often come with a price: penalties of up to 25%, interest charges, and in some cases, personal liability for business owners.

That’s why this guide exists—to simplify Maryland's payroll system. We’ll walk you through everything: registration, required forms, tax rates, Maryland payroll taxes, payment methods, and deadlines. You’ll learn how to file electronically, respond to notices, correct errors, and avoid penalties that could drain your cash flow or damage your reputation. Whether you do payroll in-house or use third-party software, mastering compliance is essential. And in Maryland, doing it right means knowing the rules and staying ahead of them.

Understanding Maryland Payroll Tax Obligations

Payroll taxes are not a single obligation—they are a mix of state, local, and federal requirements that all Maryland employers must manage. Understanding which taxes apply and how they interact is essential to staying compliant. Failing to do so can result in incorrect filings, underpaid taxes, or late penalties that compound over time. This section breaks down each category so you can approach Maryland payroll taxes with clarity and confidence.

Maryland Payroll Taxes: What You Must Withhold and Pay 

Maryland employers must withhold state and local income tax from employee paychecks based on where the employee lives—not just where your business is located. The income tax withheld is calculated using Maryland’s official withholding tables, which vary by county and are updated periodically. Local tax rates currently range from 2.25% to 3.20%, which must be applied correctly to avoid underpayment. In addition to taxes withheld from employee wages, Maryland businesses must also pay unemployment insurance taxes. These are not deducted from employees; employers pay them directly to fund the state's unemployment benefits system. For 2025, contribution rates fall under the Table A schedule and range from 0.30% to 7.50%, depending on your experience rating with the Maryland Department of Labor.

Federal Payroll Taxes That Still Apply to Maryland Employers

Even if your business operates only in Maryland, you must comply with federal rules under the Federal Unemployment Tax Act (FUTA) and related employment taxes. You must withhold and deposit:

• Federal income tax is based on IRS tax brackets.
  
  
• The employer and the employee pay Social Security tax (6.2%).
  
  
• Medicare taxes (1.45% for each), plus an additional Medicare tax of 0.9% for employee wages exceeding $200,000.
  
  
• Federal unemployment tax (FUTA) is employer-paid and calculated separately from the Maryland UI tax.

These federal taxes apply to nearly all types of taxable income, including salaries, hourly wages, bonuses, and certain forms of other compensation. Reporting requirements are strict, and deposits must be made electronically using the EFTPS system or through a third-party provider.

Why Maryland Employers Must Understand Every Layer

Handling payroll is more than just cutting a paycheck. As a Maryland employer, you must understand the taxes you withhold from employees and those you must pay. Misclassifying income, forgetting to report taxable wages, or missing a due date can trigger audits or worse. And while payroll software can help with automation, the legal responsibility stays with you—not the software provider. Knowing how Maryland payroll taxes relate to federal rules ensures you report and remit every dollar properly. 

How to Register and Set Up Payroll in Maryland

Before you withhold a single dollar or pay taxes, your business must be appropriately registered with federal and state agencies. This section walks you through the setup process—from obtaining a federal employer identification number (FEIN) to establishing a withholding account through Maryland’s online portals.

Step 1: Obtain Your Federal Employer Identification Number (FEIN)

Every Maryland employer must register with the IRS to receive a federal employer identification number. This number is required to report employment taxes, pay federal income tax, and file year-end forms like the W-2. You can apply online through the IRS’s EIN Assistant in a process that usually takes minutes. Once issued, this number will also be used when registering for Maryland state taxes, opening a payroll account, or applying for any required tax license.

Step 2: Complete Maryland’s Combined Registration

After receiving your FEIN, the next step is to complete Maryland’s Combined Registration Application. This form is required for setting up multiple business tax accounts, including:

• Withholding tax account
  
  
• Sales and use tax
  
  
• Unemployment insurance taxes

You can file the combined registration online through the Maryland Comptroller’s Online Services Center or using the paper form and fax/mail options. The process must be completed within 20 days of paying your first wages in Maryland. Skipping this step will leave you without a valid withholding account, making deducting taxes from employee wages illegal.

Step 3: Register for Maryland Unemployment Insurance

If your business hires eligible employees, you must register for unemployment insurance coverage through the Maryland Department of Labor’s BEACON system. This is separate from income tax withholding and applies even to small employers or those offering personal services performed seasonally. Using BEACON allows you to file UI reports, view rates, and submit payments electronically. You must complete this step alongside income tax registration to avoid gaps in coverage or missed payments.

Step 4: Set Up Withholding and Payroll Systems

After registration, set up your internal systems to ensure compliance with withholding requirements. This includes:

• Collecting Form W-4 (federal) and MW507 (Maryland) from each employee.
  
  
• Recording complete employee data: Social Security numbers, addresses, and filing status.
  
  
• Configuring payroll software or manual systems to calculate taxes based on the employee’s county of residence and income.
  
  
• Scheduling regular reporting of wages and tax deposits in line with your assigned filing frequency.

Comparison 1: Registration Steps – Federal vs. Maryland

1. Employer Identification Number (EIN)

• Federal (IRS): You must obtain a Federal Employer Identification Number (FEIN/EIN) using the IRS EIN Assistant.
• Maryland: The same EIN is used for Maryland state filings.
• Deadline: Must be acquired before hiring employees.

2. Tax Account Registration

• Federal (IRS): Not applicable; no separate tax account registration required.
• Maryland: Employers must complete a Combined Registration to register for income tax withholding, unemployment insurance, and other applicable state taxes.
• Form/System: Use CRA (Combined Registration Application) via Maryland Online Services.
• Deadline: Must register within 20 days of paying the first wage.

3. Withholding Setup

• Federal (IRS): Employers are required to collect Form W-4 from each employee.
• Maryland: Employers must collect Form MW507 and ensure the employer withholding account is registered via Maryland Tax Connect.
• Deadline: Setup must be completed before issuing the first paycheck.

4. Unemployment Insurance Registration

• Federal (IRS): Covered under FUTA (Federal Unemployment Tax Act); no separate system registration required.
• Maryland: Requires registration through the BEACON system for state unemployment insurance.
• Form/System: BEACON portal.
• Deadline: Registration must be done before processing payroll.

Maryland Payroll Tax Forms and Filing Schedules

Once your business is registered and payroll systems are in place, your next obligation is staying on top of Maryland’s withholding tax returns, reporting, and due dates. This includes submitting the required forms, understanding your filing schedules, and ensuring that all wages and taxes withheld are accurately reported to both state and federal agencies.

Maryland Tax Forms Employers Must File

The Maryland Comptroller’s Office requires several forms to be submitted at regular intervals throughout the year:

• Form MW506: This is the employer’s withholding tax return, filed either monthly, quarterly, or on an accelerated basis, depending on your filing schedule.
  
  
• Form MW508: An annual reconciliation report summarizing total wages paid and income tax withheld for the calendar year. It must be submitted by January 31 following the end of the year.
  
  
• Form MW507: Completed by employees to determine their personal local income tax withholding rate based on their Maryland county of residence.
  
  
• CRA (Combined Registration Application): Initially submitted to set up your Maryland tax account for withholding, sales tax, and other taxes.

In addition to Maryland forms, employers must also file federal tax returns (Forms 941, 940, and W-2) covering the same employee wages and tax data.

Understanding Maryland Filing Frequencies

Maryland assigns employers to one of five filing categories based on the amount of tax withheld in the prior year:

1. Accelerated: $15,000 or more withheld in the previous calendar year. Returns and payments must be submitted within three business days of each payroll period.
   
   
2. Monthly: More than $700 withheld per quarter. File by the 15th of the following month.
   
   
3. Quarterly: Less than $700 withheld per quarter. File by the 15th day after each quarter ends (April 15, July 15, October 15, and January 15).
   
   
4. Annual: Less than $250 in total withholding for the year. Return due by January 31.
   
   
5. Seasonal: It only operates during part of the year. It must be filed during active months as approved. Failing to file on time, especially in the fourth quarter, can lead to a mismatch in annual reconciliation and trigger penalties or system flags.

Reporting Wages Accurately

Always match the wage data on your withholding tax returns with what’s reported on employee W-2s and Maryland income tax returns. Federal and state data discrepancies can result in delayed processing or rejected filings. Also, ensure you apply the correct local income tax rates based on the MW507 forms for each employee.

Payroll Tax Withholding: How to Calculate and Report

Correctly calculating and depositing payroll taxes begins with understanding what you owe and what you’re required to withhold. This section explains how Maryland state income tax withholding works, which federal taxes still apply, and how to accurately report wages and taxable income.

How to Calculate Maryland State Income Tax Withholding

Maryland employers must withhold both state and local income taxes from each paycheck. The exact income tax withheld depends on the employee’s filing status and county of residence. Maryland provides official withholding tables that guide employers through the process. These tables reflect the current Maryland income tax rate (ranging from 2.25% to 3.20% locally) and apply to all employee wages, regardless of business location.

To calculate withholding:

1. Start with gross wages for the pay period, including regular pay, tips, and other compensation.
   
   
2. Subtract pre-tax deductions (such as retirement or insurance contributions) to determine taxable income.
   
   
3. Apply exemptions and deductions listed on the employee’s MW507 form.
   
   
4. Use Maryland’s percentage method or official withholding tables to determine the correct amount to withhold.

Employees must complete a new MW507 form any time their residence changes or if they modify their exemption status. Using outdated or incorrect forms may result in inaccurate withholding amounts and errors in year-end reconciliation.

Federal Withholding: Social Security and Medicare

In addition to Maryland requirements, all employers must comply with federal employment tax obligations. This includes:

• Federal income tax: Withheld based on the IRS’s federal tax brackets.
  
  
• Social Security: 6.2% withheld from the employee and matched by the employer.
  
  
• Medicare taxes: 1.45% withheld from both the employee and employer.
  
  
• Additional Medicare tax: 0.9% withheld on employee wages exceeding $200,000 annually (employer match not required).

These taxes apply to nearly all types of taxable income, including bonuses, commissions, and fringe benefits.

How and When to Report Wages and Withholding

All withheld taxes and total wages paid must be reported regularly. Employers use:

• MW506 for quarterly Maryland reporting
  
  
• MW508 for annual reconciliation
  
  
• Form W-2 to report employee wages and withholdings to the IRS and the state.
  
  
• Form 941 for quarterly federal employment taxes

It’s essential to ensure your records match across all filings. A mismatch between federal and state reports—especially in gross wages or income tax withheld—can result in processing delays or penalties.

Common Mistakes and How to Avoid Payroll Tax Penalties

Even minor errors in reporting wages or submitting tax returns can trigger costly consequences. Understanding Maryland’s most common payroll pitfalls helps employers stay compliant and avoid penalties that cut into operating budgets.

Easily Avoidable Mistakes Employers Make

1. Filing the wrong form or using outdated versions: Employers must use the latest MW506, MW508, and MW507 forms. Using obsolete versions can delay processing or cause a rejected filing.
   
   
2. Missing a filing deadline: If you overlook a due date—especially in the fourth quarter—it could affect your year-end reconciliation. Late submissions often trigger automatic penalty assessments.
   
   
3. Incorrect or incomplete wage reports: Submitting wage reports that don’t match W-2s or federal forms can raise red flags with the IRS and Maryland Comptroller.
   
   
4. Failing to track filing schedules: Businesses assigned to quarterly or accelerated filing schedules sometimes submit monthly by mistake. This mismatch confuses your tax account and can lead to underpayment notices.
   
   
5. Underreporting income or tax withheld: If the withholding tax amount is miscalculated due to using the wrong local rate or skipping exemptions, your reported data won’t align with state records. The result is often a recalculated tax liability and penalty notice.

Comparison 2: Maryland vs. Federal Payroll Tax Penalties

1. Late Filing

• Maryland Penalty: Up to 25% of the tax due.
• Federal Penalty: 5% of the unpaid tax per month, up to a maximum of 25%.
• Common Trigger: Missing deadlines for forms such as MW506 (Maryland) or Form 941 (Federal).

2. Late Payment

• Maryland Penalty: Combination of interest and penalties, potentially reaching up to 25%.
• Federal Penalty: Interest plus a late payment penalty of 0.5% to 1% per month.
• Common Trigger: Failing to pay through required systems like EFT (Maryland) or EFTPS (Federal Electronic Federal Tax Payment System).

3. Inaccurate Wage Reporting

• Maryland Penalty: The filing may be rejected, and the employer could be subject to audit or required to resubmit.
• Federal Penalty: May result in wage mismatch notices and possible audit risk.
• Common Trigger: W-2 forms do not match what’s reported on Form 941 (Federal) or MW508 (Maryland).

4. Incorrect Filing Frequency

• Maryland Penalty: Can lead to delayed processing or penalties.
• Federal Penalty: Not applicable — the IRS generally does not penalize based on frequency errors unless they impact timely filing or payment.
• Common Trigger: Submitting returns monthly instead of quarterly, or vice versa, based on the assigned filing schedule.

When to Seek Professional Help

Even the most organized businesses can encounter complications with payroll processes, especially when dealing with multi-state employees, high staff turnover, or complex tax scenarios. When compliance goes beyond straightforward filing, it may be time to hire a professional.

Situations Where Help Is Strongly Advised

• You employ out-of-state or remote workers: If your team includes residents of West Virginia, DC, or Pennsylvania, you may face nonresident tax issues affecting Maryland and other states.
  
  
• Your employees work irregular schedules: Businesses with seasonal or variable pay periods need more tailored payroll planning to avoid misreporting earnings or triggering withholding issues.
  
  
• You’re unsure about exemptions or wage classifications: Certain employees, such as tipped workers, family members, or contractors, often create gray areas in reporting. Misclassification can result in severe fines.

When dealing with audits, back taxes, or multiple corrections to previously submitted filings, it’s best to work with a Certified Public Accountant (CPA), enrolled agent, or tax attorney. These professionals can navigate the system and speak directly to agencies like the Comptroller of Maryland or the Maryland Department of Labor on your behalf. Tax professionals provide peace of mind for many Maryland employers, especially those growing quickly or managing multiple job sites.

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Frequently Asked Questions (FAQs)

What should Maryland employers know about federal income tax withholding?

Maryland employers must withhold federal income tax from employee wages based on IRS guidelines. The amount withheld depends on the amount of income tax owed, the employee’s filing status, and their Form W-4. Errors in withholding can lead to penalties or tax underpayment for employees. Employers should always double-check their calculations using IRS tools and deposit withheld taxes promptly to avoid compliance issues with the federal government.

How are employment taxes different from other business taxes?

Employment taxes cover obligations tied to having employees, including federal and state income tax withholding, state unemployment tax, and Social Security and Medicare contributions. These taxes differ from income tax on business profits. Employers must manage each component separately and report accurate data to federal and state agencies. Managing these correctly ensures employees receive full social security benefits and your business complies with federal and state laws.

Who is responsible for the Additional Medicare Tax, and when does it apply?

The Additional Medicare Tax applies to employees who earn over $200,000 in a calendar year. Employers must withhold an extra 0.9% once that threshold is reached, although they are not required to match it. This is in addition to the standard 1.45% Medicare tax. Funds go toward federal health and social security benefits. Employers should monitor earnings closely and ensure proper withholding to comply with the federal government.

Can employers claim tax credits when filing Maryland payroll taxes?

Yes, employers may be eligible for tax credits, such as the income tax credit or the earned income tax credit, depending on their filing situation. These credits can reduce payroll tax liability and improve cash flow, especially for small businesses. Eligibility is based on employee income levels, job creation, and other factors. Always consult state rules before claiming credits on Maryland income tax returns or federal filings.

Why is electronic funds transfer the preferred method for payroll tax payments?

Electronic funds transfer (EFT) is the preferred method for submitting payroll tax payments to state and federal agencies. It ensures payments are processed securely and on time. Using EFT also helps track payments tied to each employee's tax rate and provides an audit trail. Most large employers must use EFT, and it’s one of the best ways to stay compliant and avoid penalties for late payments.