Maryland Tax Withholding: Rules and Requirements

Maryland’s tax withholding system is a “pay-as-you-go” method for collecting state and local income taxes from employee wages throughout the year. This approach prevents a large tax bill for employees at year-end while providing a steady revenue stream for the state. The process is a shared responsibility where employees declare their tax status and employers calculate, collect, and remit the funds. The state’s system is designed to align with federal tax withholding practices, making it a parallel process for employers.

Completing the Employee’s Withholding Exemption Certificate

Accurate tax withholding is based on Maryland’s Form MW507, the Employee’s Withholding Exemption Certificate. Employees use this form to declare the correct amount of state and local income tax to be withheld from their pay. The current version of Form MW507 is available on the Comptroller of Maryland’s website.

To complete the form, an employee provides their name, Social Security number, and county of residence. The employee must also select a filing status and determine the number of personal exemptions they can claim. A worksheet included with the form guides this calculation.

Dependency exemptions for qualifying children or relatives can also be claimed. If an employee expects a higher tax liability due to other income, they can request that additional funds be withheld from each paycheck to avoid a large balance due at tax time.

An employee may be exempt from Maryland withholding if they had no state tax liability in the prior year and expect none in the current year. To maintain this status, a new Form MW507 must be filed by February 15th each year.

If an employee fails to submit a certificate, the employer withholds tax as if the employee were single with zero exemptions. If the address is missing, local tax is withheld at the maximum rate of 3.20%.

Employer’s Duty to Calculate and Remit Taxes

After receiving a completed Form MW507, an employer must calculate the correct amount of tax to withhold. Employers use official Maryland withholding tables or a percentage method formula provided by the Comptroller of Maryland. These tools use the employee’s wage amount, pay frequency, and exemption count to determine the tax amount.

The Comptroller of Maryland assigns each employer a filing frequency—accelerated, monthly, quarterly, or annually—based on the amount of tax collected. For example, employers withholding $700 or more per quarter file on a monthly basis, with payments due by the 15th of the following month. Those withholding smaller amounts have less frequent deadlines.

Employers can submit payments by mailing a paper Form MW506, the Employer’s Return of Income Tax Withheld, with a check. A more common method is using the state’s online portal, Maryland Tax Connect, to file Form MW506 and pay the taxes due.

The Annual Withholding Reconciliation Process

At the end of the calendar year, employers must complete an annual withholding reconciliation. This process serves as a summary of the year’s withholding activities for all employees. It ensures the total taxes reported and paid match the amounts on each employee’s annual wage statement, Form W-2.

The document for this process is Form MW508, the Annual Employer Withholding Reconciliation Return. On this form, the employer reports total wages paid and total Maryland income tax withheld for all employees. These totals must be consistent with all periodic payments made using Form MW506.

Employers must submit the completed Form MW508 by January 31st of the following year, and any underpayment must be paid at the time of filing. Employers with 25 or more employees are required to file their reconciliation and W-2s electronically through the Maryland Tax Connect portal, while smaller employers may submit a paper form.

Withholding on Other Types of Income

For individuals who work in Maryland but reside in another state, employers must withhold Maryland income tax unless a reciprocal agreement exists. An employee from a state with such an agreement can file Form MW507 to claim an exemption from this withholding. For non-residents from other states, employers use a rate that combines the state income tax and a 2.25% non-resident rate; this calculation does not include local tax.

Withholding on pension and annuity payments is voluntary and initiated by the recipient. Individuals can use Form MW507P to request that the payer withhold a specific whole dollar amount of state income tax from their payments, helping them manage their tax liability on this income.

Payers of gambling winnings that exceed $5,000 are required to withhold Maryland income tax. The rate for non-residents is 8.75%. For Maryland residents, the rate is 8.75%, but it increases to 9.5% on July 1, 2025. This rule also applies to pari-mutuel winnings over $5,000 that are at least 300 times the original wager.