10 Critical Steps When Hiring Employees in Maryland

Barbara C. Neff

New Maryland employers probably have a lot on their plates, but, if they don’t stay on top of the obligations imposed on them by federal laws and state laws, they could run into trouble. Here are some vital steps every Maryland employer should take with their new hires.

1. Register for taxes as an employer

If you haven’t already done so, you need to register as an employer with the IRS and the Comptroller of Maryland.

You must first apply for a federal employer identification number (FEIN) using IRS Form SS-4, “Application for Employer Identification Number.” When you have your FEIN, you can register with the Maryland Comptroller. You can do that online with the Combined Application Registration that allows a business to register for purposes of both withholding tax (see Step 5 below) and unemployment insurance (see Step 4 below).

Alternatively, you can download the paper version and mail it to:

Comptroller of Maryland
Revenue Administration Center
110 Carroll Street
Annapolis, MD 21411-0001

Your Entity Identification Number will be assigned by the Maryland Department of Assessments and Taxation.

2. Confirm employee eligibility

Every new employee you bring on board must complete the U.S. Citizenship and Immigration ServicesForm I-9, “Employment Eligibility Verification.” The new employee is required to fill out Section 1 of the form by their first day of employment. You need to complete the employer portion, Section 2, by the end of the third business day after the employee begins work. Keep it on file for three years after the date of hire or one year after the employment ends, whichever is later.

Maryland doesn’t currently require employers to use the federal E-verify system.

3. Submit your new hire reports

The federal Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) requires all employers to report certain information on their new hires (for example, an employee’s Social Security Number) to a designated state agency. In Maryland, that’s the Department of Human Services, Child Support Administration. The information is used to locate parents who owe child support.

Employers are also required to report a former employee who has been separated from employment for at least 60 consecutive days. If the returning employee has not been formally terminated or removed from payroll records, you’re not required to report that individual as a new hire.

It’s also “highly recommended” that you report any independent contractors by providing a copy of the independent contractors’ IRS Form W-9, “Request for Taxpayer Identification Number or Certification,” or IRS Form 1099-NEC, “Nonemployee Compensation.”

An employee working for a sole proprietorship must be reported unless that person is a spouse, child under age 21, or parent of the sole proprietor.

You generally must submit the new hire form within 20 days of the date of hire. But, if you report electronically or by magnetic medium, you’re required to submit two transmissions each month (if necessary, based on the volume of hiring), not less than 12 days nor more than 16 days apart.

Maryland law sets a penalty limit of $20 per month if a new hire reporting violation occurs, or $500 if the failure to report is the result of a conspiracy between the employer and the employee.

4. Determine your liability for unemployment insurance

Under Maryland unemployment insurance law, you generally must:

  • Report every employee’s wages to the Maryland Division of Unemployment Insurance,
  • Pay quarterly unemployment insurance taxes on those wages, and
  • Have an employer account assigned by the Division of Unemployment Insurance. You can apply for such an account through the state’s BEACON system if you haven’t already completed the Combined Application Registration (see Step 1 above).

Several types of employees are exempt, though.

As long as your account remains open, you must report your payroll and pay unemployment insurance taxes four times a year. You have one month following the end of each quarter to file reports and pay the tax, even if you paid no wages during that quarter. If you paid no wages in the quarter, the reported wage amount is zero. You should report this information using the BEACON system.

Your quarterly unemployment insurance taxes are based on your benefit charges and the taxable wages you report. Maryland has six unemployment insurance tax tables, ranging from Table A, which includes the lowest rates, to Table F, which includes the highest rates. On each tax table, an employer’s benefit ratio corresponds with a specific tax rate.

The Maryland Division of Unemployment Insurance determines an employer’s benefit ratio (also known as the experience rate or earned rate) by dividing its benefit charges (the amount of benefits paid to employees that are attributable to that employee) by its taxable wages in the three fiscal years prior to the computation date. The computation date is always the July 1 date before the calendar year. For example, the computation date for calendar year 2023 was July 1, 2022.

Under Table C (the current table), tax rates generally range from a minimum of 1.00% to a maximum of 10.50%. For 2023, the tax rate for new employers is 2.30%. The rate for new employers that are in the construction industry and headquartered in another state is 5.10%. The taxable wage base is $8,500, so the applicable rate is applied only to the first $8,500 of an employee’s wages.

The standard rate for 2023 is 10.50%. This rate is assigned when an employer is eligible for an earned rate but has no taxable wages in a fiscal year (July 1 to June 30) because it didn’t file quarterly tax and wage reports. The standard rate is the highest rate from the applicable table of rates.

You can ask to enroll in a payment plan for quarterly unemployment insurance payments. If allowed, you’ll then be able to make quarterly contribution payments in three-month installments or in customized monthly installments (as opposed to four lump-sum payments per year). Requests for payment plans are reviewed on a case-by-case basis.

5. Understand your Maryland withholding duties

You must withhold Maryland state income tax from your employee’s pay. The first step to determine the amount to withhold is to have the employee complete Form MW507, “Employee’s Maryland Withholding Exemption Certificate,” at the time of or before hiring. If the employee doesn’t submit a completed form, you must withhold the tax as if the employee had claimed one withholding exemption.

You can use the Regular Method Withholding Tables to determine the estimated amount of Maryland and local income tax that must be withheld from employee wages. To determine the precise amount to be withheld, use the Percentage Method Tables.

You can file the withheld taxes electronically or with pre-printed coupons (from a coupon book obtained from the Comptroller) submitted with your Form MW506, “Employer’s Return of Income Tax Withheld.” To reduce paper and encourage the use of the online service, these books must now be requested—they aren’t routinely sent to every employer.

You must file your withholding reports according to the schedule dictated by Maryland’s filing categories:

  • Accelerated: Employers that were required to withhold $15,000 or more for the preceding calendar year and also have accumulated $700 of withholding tax in any pay period must remit the withholding payment within three business days following that payroll.
  • Quarterly: Employers with less than $700 of withholding per quarter must file by the 15th day of the month that follows a calendar quarter in which income tax was withheld.
  • Monthly: Employers with more than $700 of withholding in any one quarter must file by the 15th day of the month following the month in which the income tax was withheld.
  • Seasonally: Employers that operate only during certain months can request prior approval to file seasonally.
  • Annually: Employers with less than $250 withholding per calendar year are required to remit the tax withheld on an annual basis by January 31 of the year following the year the income tax was withheld.

If you have a new account, you must file reports at least quarterly. Your account will be reviewed at the end of the year to determine if your filing requirement needs to be changed.

If you don’t owe tax, you’re still required to file a return. In this case, you can file a zero report using Maryland’s telefile service at (410) 260-7225.

You’re also required to submit a year-end reconciliation (Form MW508, “Annual Employer Withholding Reconciliation Return”) to the Comptroller of Maryland by January 31 of each year, with no extensions permitted.

6. Prepare for your federal payroll tax obligations

Employers are usually required to withhold federal income tax from each employee’s pay. You’ll need to collect IRS Form W-4, “Employee’s Withholding Certificate,” from each new hire, on or before the day they start work. The form is used to determine how much of their pay you must withhold for federal income taxes. Make sure your employees complete it properly.

You don’t need to submit Form W-4 to the IRS, but you must keep a copy on file for at least four years. The form confirms that you’re withholding federal income tax according to the employee’s instructions and must be available for inspection if the IRS ever requests it. 

You also must withhold each employee’s share of Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).

FICA is a federal tax that both employers and employees pay. It includes two taxes: Medicare tax and Social Security tax. The 2023 tax rates for both employees and employers are 6.2% of the first $160,200 of an employee’s earnings for Social Security (for a total of 12.4%) and 1.45% of all wages for Medicare (a total of 2.9%).

You also may be required to withhold the Additional Medicare Tax. Employers must withhold the 0.9% tax from an individual’s wages paid in excess of $200,000 in a calendar year.

You must deposit federal income tax withheld and both the employer and employee Social Security and Medicare taxes. The IRS deposit schedules are either monthly or weekly. You must determine which schedule you’re required to use before the beginning of each calendar year.

In addition, you need to pay federal unemployment taxes (FUTA) if you meet federal unemployment tax requirements:

  • Paid wages of $1,500 or more to employees in any calendar quarter during the current or previous tax year, or
  • Had one or more employees for at least some part of a day in any 20 or more different weeks in the previous year or 20 or more different weeks in the current tax year, counting all full-time, part-time, and temporary employees.

The amount due is 6% of the first $7,000 of an employee’s wages during the year.

Be sure to also keep up with filing your IRS Form 941, “Employer’s Quarterly Federal Tax Return,” and IRS Form 940, “Employer’s Annual Federal Unemployment Tax Return.” Deposits for the federal unemployment tax are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter. Form 940 is due by January 31, but, if you deposited all FUTA tax when due, you have until February 10 to file.

File your initial Form 941 for the quarter in which you first paid wages that are subject to Social Security and Medicare taxes or subject to federal income tax withholding. The form is due by the last day of the month that follows the end of the quarter. If you were timely and deposited all taxes when due, you have 10 additional calendar days to file the return. 

After the first filing, you must file Form 941 for every quarter, regardless of whether you have any taxes to report—unless you’re a seasonal employer or are filing your final return.

Employers are required to furnish a completed wage and tax statement (Form W-2, “Wage and Tax Statement,” or Form 1099-NEC, “Nonemployee Compensation”) to each employee by the last day of January each year. You’ll also provide a copy to the Maryland Comptroller.

7. Obtain Workers’ compensation coverage

All Maryland employers with at least one employee must have workers’ compensation insurance coverage. You can purchase workers’ compensation insurance from any insurance company licensed to write workers’ compensation insurance in the State of Maryland or from the Chesapeake Employers’ Insurance Company. You may also apply to become a self-insured employer, which requires prior approval of the Workers’ Compensation Commission.

If you fail to secure workers’ compensation insurance, you could face a fine of not more than $10,000. If your business is a corporation, the officers of the corporation having the responsibility for the general management of the corporation in Maryland will be liable for any fines.

8. Be careful about noncompete agreements

In Maryland, employers can’t require a prospective or current employee to sign a noncompete or conflict of interest provision if the employee earns equal to or less than 150% of the state minimum wage, as of Oct. 1, 2023. Before then, noncompete agreements are prohibited if the employee earns equal to or less than $15 per hour or $31,200 annually. 

9. Post the mandated employment law posters

Federal law requires you to post the following posters in a conspicuous location in your workplace:

The U.S. Department of Labor has an online “poster advisor” to help employers determine which posters they need to display.

In Maryland, local and state law mandatory postings include:

10. Follow the applicable employment laws

Maryland businesses are subject to a wide range of federal labor laws, including the following:

The state also has a variety of laws that could affect you as a Maryland employer. For example, Maryland’s minimum wage currently weighs in at $12.80 per hour for employers with 14 or fewer employees and $13.25 per hour for employers with 15 or more employees. On Jan. 1, 2024, the minimum wage will increase to $15 per hour for all employers regardless of size.

Other potentially relevant Maryland laws include:

Employers’ many legal, tax, and financial obligations can eat up a lot of time and resources. Services like those offered by Gusto can help reduce the burden.

Barbara C. Neff has been writing about a variety of legal and other topics since 2001. She has a law degree and a master's degree in journalism.
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