Maryland Pass-Through Entity Tax: What You Need to Know

Maryland’s pass-through entity tax is a notable development for businesses operating within the state, reshaping how taxes are managed and paid. This structure addresses federal limitations on state and local tax deductions, offering potential advantages for business owners.

Entities Subject to the Tax

The tax applies to S corporations, partnerships, and limited liability companies (LLCs) electing pass-through taxation. These entities pay the tax at the entity level, which may mitigate the impact of the federal cap on state and local tax deductions for individual owners. Sole proprietorships and entities taxed as corporations are excluded, as they do not qualify as pass-through entities.

The tax rates are 8% for nonresident members and 5.75% for resident members, aligning with Maryland’s individual income tax rates. This approach ensures consistency with what members would owe if taxed individually.

Calculation of the Tax

The tax is based on the distributive share of income allocated to each member or shareholder. Total income generated by the entity is divided among members according to ownership interest or agreement terms.

For resident members, the rate is 5.75%. Nonresident members are taxed at 8%. The entity is responsible for remitting the tax. For instance, if an S corporation has $1 million in distributive income and a nonresident member with a 20% share, the entity would remit $16,000 for that member. A resident member with the same share would incur $11,500 in tax.

Filing Requirements

Entities must file their returns using Form 510, which details income distributions and corresponding tax liabilities. The filing deadline aligns with the federal tax deadline, typically March 15th for calendar-year filers. Extensions to September 15th are available but do not extend the payment deadline.

Compliance requires maintaining detailed records to support income allocations and tax calculations, including financial statements and member agreements.

Payment Deadlines

Payments are due on the same date as the filing deadline, typically March 15th for most calendar-year entities. Late payments incur interest and penalties.

Nonresident Withholding

The tax includes provisions for nonresident withholding to ensure compliance from members who do not reside in Maryland. Entities must withhold taxes on behalf of nonresident members at the 8% rate, calculated based on their distributive share.

For example, if a nonresident member’s distributive income is $150,000, the entity must withhold and remit $12,000 to the state. These payments are credited to the nonresident member’s Maryland tax liability. Withholdings must be reported on Form 510, and nonresident members receive a Maryland Schedule K-1 detailing income and withholdings.

Failure to comply with withholding requirements can result in penalties for under-withholding, late payments, or incorrect remittances. Entities should establish systems to track income, calculate withholding amounts, and meet deadlines. Consulting tax professionals can help ensure compliance and reduce administrative challenges.