LLC Taxes in Maryland: What Are the Requirements?

A Limited Liability Company (LLC) is a business structure authorized by state law that provides owners with liability protection, separating personal assets from business debts. An LLC is not a distinct tax entity in the eyes of the Internal Revenue Service (IRS); instead, it can adopt the tax status of other business types. This adaptability has significant implications for how an LLC is taxed at both the federal and state levels.

Federal Tax Classification for LLCs

The IRS provides default tax classifications for LLCs based on the number of members. A single-member LLC is automatically treated as a “disregarded entity.” This means for federal income tax purposes, the IRS ignores the LLC as a separate entity, and its income and expenses are reported directly on the owner’s personal tax return using Schedule C of Form 1040, just like a sole proprietorship.

For an LLC with two or more members, the default classification is a partnership. The LLC must file a separate informational tax return, Form 1065, U.S. Return of Partnership Income, which reports the LLC’s income, deductions, gains, and losses. The LLC itself does not pay federal income tax. Instead, profits and losses are “passed through” to the members, who each receive a Schedule K-1 and report this information on their personal income tax returns.

An LLC has the option to elect to be taxed as a corporation by filing Form 8832, Entity Classification Election. An LLC can choose to be taxed as a C corporation, which requires the business to be taxed separately from its owners. The LLC files a corporate income tax return (Form 1120) and pays taxes at the corporate rate on its net profits.

Alternatively, an LLC can elect to be taxed as an S corporation by filing Form 2553. An S corporation is also a pass-through entity, similar to a partnership. The S corporation files an informational return (Form 1120-S), and the profits and losses are passed through to the owners via a Schedule K-1. This election can offer tax advantages related to self-employment taxes but comes with more stringent administrative requirements.

Maryland State Income Tax Obligations

The way a Maryland LLC is taxed by the state directly mirrors its federal tax classification. The state honors the default and elective statuses chosen with the IRS, which determines which forms are filed and how taxes are paid to the Comptroller of Maryland.

LLCs Taxed as Pass-Through Entities (Default)

For LLCs operating under their default federal status as a sole proprietorship or partnership, Maryland treats them as pass-through entities. The LLC itself does not pay state income tax; instead, profits are passed to its members, who are responsible for paying the tax on their personal returns using Form 502.

All pass-through entities, including multi-member LLCs and S corporations, must file an annual Maryland Pass-Through Entity Income Tax Return, Form 510. If the LLC has non-resident members, it is required to pay income tax on their behalf for income derived from Maryland. The tax is calculated at a rate of 8.75% for individual non-resident members and 8.25% for non-resident entity members.

Maryland also offers an elective pass-through entity tax. An LLC can choose to pay Maryland income tax at the entity level for all its members by filing Form 511. This election was created in response to the federal $10,000 State and Local Tax (SALT) deduction cap. By having the LLC pay the state tax, the payment becomes a deductible business expense on the LLC’s federal return, bypassing the individual SALT cap for the members.

LLCs Taxed as C Corporations

If an LLC has elected to be taxed as a C corporation, it will also be taxed as a corporation in Maryland. The LLC is responsible for paying Maryland corporate income tax on its net income derived from the state at a flat rate of 8.25%.

The LLC must file a Maryland Corporation Income Tax Return, Form 500, with the Comptroller of Maryland. This form is used to report the corporation’s income, deductions, and calculate the tax due. Profits distributed to the owners as dividends are then taxed again at the individual level on their personal tax returns, a characteristic known as double taxation.

LLCs Taxed as S Corporations

When an LLC elects to be taxed as an S corporation for federal purposes, Maryland honors this classification. As a pass-through entity, the LLC’s profits and losses are not taxed at the entity level but are passed through to the members. The LLC must file the annual Maryland Pass-Through Entity Income Tax Return, Form 510. Members then report their respective shares of the income on their personal Maryland tax returns.

Annual Reporting and Property Tax Requirements

Every LLC registered in Maryland has an annual filing requirement with the State Department of Assessments and Taxation (SDAT). This mandatory report ensures the state has up-to-date information on the business and serves as the mechanism for assessing business personal property tax. Failure to comply can result in the LLC losing its “good standing” status, which can jeopardize its liability protection.

Maryland LLCs must file an Annual Report and, if applicable, a Personal Property Tax Return together using Form 1 by April 15th each year. Even if an LLC owns no personal property and has no business activity, it is still required to file the Annual Report portion of Form 1 to maintain its legal status. A 60-day extension to file the form can be requested, pushing the due date to June 15th.

The Annual Report section of Form 1 requires basic information to confirm the LLC’s details, such as its principal office address and the name and address of its resident agent. The Personal Property Tax Return section requires the LLC to declare all tangible personal property it owns, leases, or uses within Maryland, such as furniture and equipment. This filing with the SDAT is a separate obligation from income tax returns filed with the Comptroller of Maryland.

Other Maryland Business Taxes

An LLC operating in Maryland may be subject to several other taxes depending on its specific business activities. These taxes are administered by the Comptroller of Maryland and require separate registrations.

If an LLC sells tangible goods or provides certain taxable services, it must register for a sales and use tax license. The statewide sales tax rate is 6%, with a separate 3% tax on certain technology services. The LLC is responsible for collecting the applicable tax from its customers at the point of sale and then remitting the collected funds to the Comptroller.

An LLC that has employees is required to register for a withholding account with the Comptroller. This makes the LLC responsible for withholding Maryland state and local income taxes from employee wages, based on the employee’s completed Form MW507. These withheld funds must be remitted to the state periodically.

LLCs with employees must also pay unemployment insurance taxes, which requires registering with the Maryland Department of Labor. These taxes are paid by the employer on a portion of each employee’s wages to fund unemployment benefits. New employers are assigned a standard rate that can change over time based on the company’s history of unemployment claims.

Registering for Maryland Taxes

Before an LLC can register for most Maryland business taxes, it must first obtain a Federal Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number that identifies the business for federal tax purposes. Applying for an EIN is a straightforward process that can be completed online through the IRS website.

Once the EIN is secured, the primary tool for setting up state tax accounts is the Maryland Combined Registration Application (CRA). This application is a centralized method for registering an LLC with the Comptroller of Maryland for several tax types simultaneously, allowing a new business to establish multiple accounts with a single filing.

The CRA can be used to apply for a sales and use tax license, an employer withholding tax account, and an unemployment insurance account. The application can be filed online through the Maryland Business Express portal or by mail. When completing the application, have the LLC’s legal name, federal EIN, and details about the business’s activities ready.