Maryland Withholding Tax Facts for Employers

Maryland withholding tax is a state income tax that employers collect from their employees’ wages. This pay-as-you-go system helps employees prepay their annual state income tax liability, preventing a large tax bill when their annual return is filed. The funds collected are a primary source of revenue for the state, supporting public services. Employers are responsible for accurately calculating, collecting, and remitting the tax to the state. The process is governed by state regulations and involves several steps, from initial registration to annual reconciliation of the taxes withheld.

Employer Registration and Employee Forms

Before an employer can withhold state income tax, they must establish a withholding account with the Comptroller of Maryland. This is done by completing a Combined Registration Application, which can be filed online through the Maryland Business Express portal. This application registers the business for various state tax accounts, including the employer withholding tax account. Upon registration, the business is assigned an eight-digit Central Registration Number (CRN) for use on all withholding forms.

Once registered, the employer must have each new employee complete Form MW507, the Employee’s Maryland Withholding Exemption Certificate. On this form, the employee declares their filing status, the total number of personal exemptions they are claiming, and any additional amount they wish to have withheld. The form also requires the employee’s county of residence for calculating local income taxes. If an employee fails to submit a completed Form MW507, the employer is required to withhold tax as if the employee were single and claiming zero exemptions.

Calculating Maryland Withholding Tax

The Comptroller of Maryland provides two methods for employers to calculate state income tax withholding: the Percentage Method and the Wage Bracket Method. The Percentage Method offers a more precise calculation. The value of one personal exemption is $3,200 annually. To calculate withholding using this method, an employer determines the employee’s gross annualized wages, then subtracts the total exemption amount to determine the taxable income.

This taxable income is then applied to the state’s graduated tax rate schedules. After calculating the annual tax, the result is divided by the number of pay periods to find the withholding amount for each paycheck, which must also incorporate the county tax rate.

As a simpler alternative, the Wage Bracket Method uses detailed withholding tables published by the Comptroller. These tables provide pre-calculated withholding amounts based on wage ranges, pay periods, filing status, and the number of exemptions. An employer finds the table for the employee’s pay frequency and filing status, locates the wage bracket, and cross-references it with the number of exemptions to find the correct withholding amount.

Payments Subject to Withholding

Maryland withholding requirements apply to regular wages and salaries paid for services performed within the state. Withholding rules also extend to payments made to residents receiving pension or annuity distributions. Payees of these distributions can elect to have Maryland income tax withheld by completing Form MW507P, where they specify the amount to withhold from each payment.

Rules are also in place for withholding on wages paid to non-resident employees who perform work in Maryland. An employer is required to withhold Maryland income tax from these wages unless the employee resides in a reciprocal state. Maryland’s reciprocal agreements include:

• Pennsylvania
• Virginia
• West Virginia
• Washington D.C.

For employees residing in these states, the employer should withhold tax for their state of residence, not Maryland.

Supplemental Wages

Payments classified as supplemental wages, such as bonuses, commissions, overtime pay, and severance pay, are also subject to state withholding. Employers have an option for handling these payments. They can aggregate the supplemental payment with the employee’s regular wages and calculate withholding on the total amount using the standard methods. Alternatively, employers can use a flat rate withholding method for these supplemental payments, which is applied directly to the supplemental wage amount in addition to any applicable local tax.

Remittance and Reconciliation Requirements

Employers must remit withheld funds to the Comptroller of Maryland according to an assigned filing schedule. The frequency depends on the total amount of tax withheld and can be accelerated, monthly, or quarterly. Employers who withhold $15,000 or more in the preceding year and accumulate over $700 in a pay period must file on an accelerated basis, within three business days of the payroll date.

Employers who withhold more than $700 in any quarter file on a monthly basis, with payments due by the 15th of the following month. Those withholding less than $700 per quarter file on a quarterly basis, with returns due by the 15th day of the month following the end of the calendar quarter. If a due date falls on a weekend or holiday, the deadline moves to the next business day.

The state requires employers to submit their withholding returns and payments electronically through the Maryland Tax Connect (MTC) portal. This online system allows for the filing of Form MW506, the Employer’s Return of Income Tax Withheld, and the associated electronic payment.

By January 31st of each year, every employer must file Form MW508, the Annual Employer Withholding Reconciliation Return. This form summarizes the total wages paid and the total Maryland tax withheld for all employees during the previous calendar year. The totals on the MW508 must match the sum of the state withholding reported on all individual employee W-2 forms for that year.