If you’re planning on opening or otherwise doing business in Maryland, you probably have a lot of questions about your potential state tax liabilities. Here are some answers to the frequently asked questions small business owners have about Maryland taxes.
How does Maryland tax corporations?
The corporation income tax applies to every corporation with income attributable to the state. The tax is imposed at a flat 8.25% rate on the Maryland taxable income.
Maryland taxable income is a corporation’s modified income—meaning the corporation’s federal taxable income from IRS Form 1120, “U.S. Corporation Income Tax Return,” adjusted for state modifications.
Corporations with multistate operations must allocate Maryland modified income using an apportionment formula that generally takes into account receipts, property, and payroll factors.
How should corporations file their Maryland corporation income taxes?
Every corporation that’s subject to Maryland income tax law and has income or losses attributable to sources within Maryland must file Form 500, “Corporation Income Tax Return.” Every Maryland corporation must file, too, even if it has no taxable income or is inactive.
The form is due by the 15th day of the fourth month after the close of the taxable year or period or by the original due date required for filing the federal return. Corporations and organizations that are allowed later due dates for federal returns under the Internal Revenue Code are allowed the same due date for Maryland income tax returns.
You can file electronically or by mail:
Comptroller of Maryland
Revenue Administration Division
110 Carroll Street
Annapolis, Maryland 21411-0001
Taxpayers making payments of $10,000 or more must file electronically.
Does Maryland require estimated tax payments for the corporate income tax?
Yes. Every corporation that reasonably expects its Maryland taxable income to owe a tax of more than $1,000 for the tax year or period must make estimated income tax payments with Form 500D, “Maryland Declaration of Estimated Corporation Income Tax.”
The total estimated tax payments for the year must be at least 90% of the tax owed for the current year or 110% of the tax that was developed for the prior year to avoid interest and/or penalty. At least 25% of the total estimated tax must be remitted by each of the installment due dates.
Corporate estimated tax quarterly returns must be filed according to the following schedule:
- 1st Quarter: 15th day of 4th Month
- 2nd Quarter: 15th day of 6th Month
- 3rd Quarter: 15th day of 9th Month
- 4th Quarter: 15th day of 12th Month
You can file electronically or by mail:
Comptroller of Maryland
Revenue Administration Division
110 Carroll Street
Annapolis, Maryland 21411-0001
Taxpayers making payments of $10,000 or more must file electronically.
How are pass-through entities taxed in Maryland?
Pass-through entities include:
- Partnerships as defined by federal income tax law,
- Limited liability companies (LLCs), as defined b Maryland law, are classified as partnerships and not taxed as a corporation or disregarded as an entity, and
- S corporations.
Pass-through entities with any nonresident members and nonresident taxable income must pay:
- A nonresident individual tax of 5.75% on the distributive or pro rata share of income for nonresident individual members, and
- A special nonresident tax of 2.25% (for a total of 8.0%) on the distributive or pro rata share of income for nonresident individual members.
So that’s a total 8% total Maryland tax on nonresident individual members.
In addition, such pass-through entities must pay an 8.25% tax on income allocable to Maryland on behalf of all nonresident entity members (as opposed to nonresident individual members).
What are the filing obligations for pass-through entities?
A pass-through entity must file Maryland Form 510, “Pass-through Entity Income Tax Return,” if the entity is formed or incorporated in Maryland, does business in Maryland, or has Maryland income (or losses). The form is due by the 15th day of the 4th month following the close of the tax year or period.
Payment of the Maryland income tax isn’t required with the filing of Form 510 unless the pass-through entity is subject to the nonresident member tax (see above). If it is, the pass-through entity can use Form 510C, “Composite Pass-Through Entity Income Tax Return,” to file a composite income tax return on behalf of nonresident individual members.
Note: The filing of Form 510 and the payment by the pass-through entity of the Nonresident Member Tax doesn’t eliminate the requirement that all nonresident and resident members file the applicable Maryland income return. The nonresident member can claim a credit for the amount of tax paid by the pass-through entity that’s attributable to that nonresident member’s share of the pass-through entity’s nonresident taxable income.
When the nonresident member tax that’s due is expected to exceed $1,000 for the tax year or period, the pass-through entity must file Maryland Form 510D, Pass-Through Entity Declaration of Estimated Tax, and make quarterly estimated payments (see below).
Does Maryland require estimated tax payments for the pass-through entity tax?
If you expect your tax to exceed $1,000 for the tax year, you must make quarterly estimated payments. The total estimated tax payments for the year must be at least 90% of the tax owed for the current tax year or 110% of the tax that was owed for the prior tax year to avoid interest and penalty.
S corporations must file Form 510D, “Pass-Through Entity Declaration of Estimated Income Tax,” on or before the 15th day of the 4th, 6th, 9th, and 12th months following the beginning of the tax year or period. Partnerships and LLCs should file by the 4th, 6th, 9th, and 13th months following the beginning of the tax year.
You can file the form online, or by mail the form and your payment to:
Comptroller of Maryland
Revenue Administration Division
110 Carroll Street
Annapolis, MD 21411-0001
Taxpayers making payments of $10,000 or more must file electronically.
Does Maryland offer a pass-through entity election?
Yes, Maryland is among the states that have enacted a workaround for owners of pass-through entities to avoid the $10,000 limit on the federal income tax deduction for state and local taxes. That means pass-through entities that aren’t taxed as a corporation can elect to pay tax at the entity level on all owners’ distributive or pro rata shares of income. They then can claim a credit against their individual state income tax for their pro rata share of the tax paid by the entity.
Owners must add back the amount of the tax credit claimed to their Maryland Schedule K-1, “Maryland Pass-Through Entity Member’s Information.”
Pass-through entities must make the irrevocable election with the first estimated tax payment of the year on Form 510/511D, “Pass-Through Entity Declaration of Estimated Income Tax.”
Are filing extensions available?
If a corporation can’t file Form 500 by the due date, it can request a filing extension using Form 500E, “Application for Extension of Time to File Corporation Income Tax Return.” You can do that online if you have previously filed Form 500 and have no estimated balance due on Line 5 of Form 500E.
Pass-through entities that can’t file Form 510 by the due date should request a filing extension using Form 510E, “Application for Extension of Time to File Pass-Through Entity Income Tax Return.” Similar to corporations, pass-through entities can request an extension online if they have previously filed Form 510 and have no estimated balance due on Line 5 of Form 510E.
A request for an extension of time to file will be automatically granted and will not be acknowledged, provided that:
- The application is properly filed and submitted by the 15th day of the 4th month following the close of the tax year or period, or by the original due date required for filing the federal return; and
- Full payment of any balance due is submitted with the application.
A seven-month extension can be granted for corporations using Form 500E and S corporations using Form 510E. Partnerships and LLCs can obtain six-month extensions. No extension will be granted for more than seven months.
Note, too, that the application extends only the time allowed to file the annual income tax return—not the time allowed to pay the tax.
Are any tax credits available?
A variety of credits are available in Maryland, including the:
- Job Creation Tax Credit
- Small Business Relief Tax Credit
- Research and Development Tax Credit
- Commuter Tax Credit
- Maryland Disability Employment Tax Credit
Maryland generally requires businesses to file their tax returns electronically to claim a business tax credit.
Does Maryland have a sales and use tax?
Maryland imposes a 6% sales tax, as well as a 6% use tax when a seller fails to collect the proper sales tax (for example, when you purchase goods from businesses located outside of Maryland for use in Maryland).
Charges for warranties, maintenance, service agreements, and insurance are taxable if the buyer is required to purchase them or they’re already included in the price of the merchandise. If the sale could be completed without paying these charges, though, the charges aren’t taxable.
Some tax exemptions may apply.
Are remote sellers subject to Maryland’s sales and use tax?
An out-of-state vendor may need to register with the Maryland Comptroller, collect and pay sales and use tax, and file Maryland sales and use tax returns if it sells tangible personal property or taxable services for delivery in the state.
The requirements apply if, during the previous calendar year or the current calendar year:
- The vendor’s gross revenue from the sale of tangible personal property or taxable services delivered in Maryland exceeds $100,000, or
- The vendor sold tangible personal property or taxable services for delivery into Maryland in 200 or more separate transactions.
How should businesses file their sales and use taxes?
A Maryland business that collects sales taxes or owes use taxes is required to file Form 202, “Sales and Use Tax Return,” by the 20th day of the month following the month in which the period ends.
Initially, your sales and use returns are due on a quarterly basis. Depending on the amount of your actual payment, your filing schedule may be changed to monthly, quarterly, semi-annual, or annual. The Comptroller’s office will notify you in advance of any change in your filing frequency.
You can file your sales and use tax return online or by mail:
Comptroller of Maryland
Revenue Administration Division
110 Carroll Street
Annapolis, MD 21411-0001
Taxpayers making payments of $10,000 or more must file electronically.
What is the timely discount?
If you file your sales and use tax return and pay your sales tax on a timely basis, you can keep a portion of the sales tax as a discount. The discount is 1.2% of the first $6,000 collected and 0.9% for the amount above $6,000.
The discount is limited to $500 for each return. A taxpayer who files or is eligible to file a consolidated return is allowed a maximum discount not to exceed $500 for all returns.
Does Maryland tax business personal property?
In Maryland, a tax on business-owned personal property is imposed and collected by the local governments; the personal property tax rates vary by location. Personal property generally includes:
- Furniture
- Fixtures
- Office and industrial equipment
- Machinery
- Tools
- Supplies
- Inventory
- Any other property not classified as real property
Limited exemptions are available, including for property used for manufacturing or research and development.
What are the state income tax withholding obligations for employers?
You must withhold Maryland state income tax from your employee’s pay (in addition to federal tax withholding obligations). 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 should 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 may 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, coupon books now must be requested—they aren’t routinely sent to every employer.
Your filing schedule depends on which filing category you fall into:
- 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.
What are the rules for Maryland’s unemployment insurance tax?
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 (this is in addition to the federal unemployment tax), 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.
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 in your 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.
Tax compliance is just one of the many challenges on small business owners’ plates. Gusto’s payroll service can ease some of the burden by making it easier to pay employees and automatically file your payroll taxes.
