Small business owners are no stranger to the need to be self-sufficient and balance competing tasks. Some responsibilities, such as paying taxes and employees, can creep up and take considerable time and paperwork to complete without proper planning. Additionally, there are many legal and financial risks for not fulfilling these obligations, especially in the state of Maryland.
We know time is precious, so weâve broken down the essential regulation and steps needed to complete payroll for small businesses in Maryland.
State Of Maryland Payroll Laws & Regulations
Before breaking down federal rules, let’s zero in more locally. Maryland has its own unique set of payroll laws and regulations that small business owners should be aware of.
Maryland Payroll Taxes
As a small business owner, there are several taxes you are liable to pay. Letâs take a look at which of these taxes apply to payroll in Maryland.
- Income Taxes: Maryland utilizes a progressive income tax ranging from 2% to 5.75% depending on income. Also, the stateâs 23 counties and the City of Baltimore impose separate income taxes, ranging from 2.25% to 3.2% depending on location. These taxes must be withheld by employers.
- Supplemental Income Tax: Additional income such as bonuses, severance pay, and commissions are subject to a supplemental tax with rates of 3.2% to 8.95%.
- Property Taxes: These taxes are determined by your local government and are not accounted for in payroll.
- Sales Tax: Generally speaking, Maryland levies a 6% sales tax on most purchases (alcohol carries a 9% sales tax). This tax does not apply to payroll, but needs to be paid quarterly through the bFile system.
- Use Tax: A use tax can apply to goods purchased outside Maryland. This tax does not apply to payroll and must be paid quarterly by specific due dates.
Keep in mind the taxes mentioned above are all in addition to federal taxes, and both must be taken out of a W2 employeeâs check.
Getting A CRN Number For Your Business
Any employer in Maryland must register to obtain a Central Registration Number (CRN) from the Maryland Comptroller. In doing so, small businesses can simultaneously register for income withholding and unemployment insurance taxes through the stateâs Combined Registration Application. Before getting started though, youâll need to get a Federal Employer Identification Number (FEIN).
Maryland’s Tax Exclusions & Exemptions
Under Maryland labor and tax laws, some forms of payment, types of employment, and employee characteristics can override withholding requirements. Some possible exemptions include the following:
- Domestic service in a private residence, including a college club, fraternity, or sorority.
- Any duties conducted by an ordained and licensed minister in service of a religious order.
- Employees engaged in foreign maritime trade within the ports of Maryland.
- Single and student employees with income less than the minimum filing requirements:
- Weekly: $234.62
- Biweekly: $469.23
- Semi-Monthly: $508.33
- Monthly: $1,016.67
- Annual: $12,200.00
Employers can follow a certificate of exemption, also known as form MW507, as a guide. This form authorizes an employer to withhold income tax and any exemptions claimed by the employee when filling it out. In the event an employeeâs earnings exceed $100,000 (if filing alone) or $150,000 (if filing a joint income tax return), they must recalculate their number of exemptions.
Meanwhile, payment to independent contractors qualifies as an exclusion in Maryland, meaning that it is income that is not subject to taxes. Independent contractors are liable for paying their own income taxes. To ensure that an independent contractor does not qualify as an employee, they must meet the following criteria:
- The individual is free from control and direction over their performance within the contract.
- The individual customarily is engaged in an independent business or occupation of the same nature as that involved in the work.
- The work is (a) outside of the usual course of business for whom the work is performed or (b) performed outside of any place of business of the person for whom the work is performed
Maryland’s Minimum Wage
Maryland is one of a growing list of states with minimum wages exceeding the federal rate of $7.25. The stateâs minimum wage is in the midst of a series of annual increases that vary by business size and county, so itâs worth double-checking to make sure youâre in compliance and prepared for upcoming changes.
Furthermore, Maryland law requires that employers visibly display posters with minimum wage and overtime laws or else be subject to $1,000 fine.
Here is the breakdown for scheduled minimum wage changes in all but two counties (Montgomery and Prince Charles):
Businesses with 14 or fewer employees:
- As of 1/1/2020: $11.00
- As of 1/1/21: $11.60
- As of 1/1/22: $12.20
Businesses with 15 or more employees:
- As of 1/1/2020: $11.00
- As of 1/1/2021: $11.75
- As of 1/1/2022: $12.50
Small businesses in Montgomery County should be aware of several changes. First off, employers with just one employee are now subject to the countyâs minimum wage. Additionally, the thresholds for a businessâs total employees used to determine minimum wage have changed as of July 1, 2019.
- As of 7/1/2019:
- Businesses with 50 or fewer employees: $12.50
- Businesses with 51 or more employees: $13.00
- As of 7/1/2020:
- Businesses with 10 or fewer employees: $13.00
- Businesses with 11-50 employees: $13.25
- Businesses with 51 or more employees: $14.00
Prince George County:
Fortunately, Prince George Countyâs changes are fairly straightforward. The minimum wage rate of $11.50 will continue for the remainder of 2020, regardless of the number of employees at your small business. As of January 1, 2021, the state minimum wage rates mentioned previously will apply to all employers in the county.
Any employee earning more than $30 per month in tips must receive earnings in line with Maryland minimum wage hourly rates. However, employers can apply a tip credit for all but $3.63 of the hourly rate.
If a tip credit is used, those employees must receive a printed or electronic wage statement each pay period in addition to pay stubs and paychecks. This statement outlines an employeeâs hourly rate and breaks down the allocation of tips between credited hours and additional cash wages.
For 2020, Maryland’s unemployment tax rate ranges from 0.3% to 7.5% with a taxable wage base of $8,500. The rate is calculated according to the ratio of an employerâs experience with benefit charges and taxable payroll over the past three fiscal years ending on June 30. Essentially, “experience” refers to whether a business has had any employees make claims for state unemployment benefits in the past.
If this is your first year in business, your unemployment tax rate is an automatic 2.6%.
These rates can vary annually, so keep an eye out for updates.
New Hire Reporting
In most cases, hiring a new employee or rehiring a former employee after a 90-day unpaid absence will need to be reported to the Maryland State Directory of New Hires. Some notable exceptions include hiring immediate family members and employees earning less than $1,000 in a quarter. Youâll need to report the following information for any new hire or rehire who doesnât meet these exceptions:
- Your Federal Employer Identification Number (FEIN)
- Your business name
- Your business address
- Your businessâs Maryland Unemployment Insurance Number
- The employeeâs full name
- The employeeâs address
- The employeeâs Social Security Number
- The employeeâs first day of work
- Medical insurance availability
- The employeeâs salary and pay frequency
As an employer, you have 20 days to report a new hire at your small business. Failing to do so could result in fines up to $500 per unregistered employee. Beyond the fees, reporting is important to mitigate fraudulent unemployment insurance claims and establish child support orders.
Maryland PTO policy differs based on the number of employees. Employers with 15 or more employees must provide paid sick and safe leave for certain employees. Since 2018, eligible employees accrue at least one hour of paid sick leave per 30 hours of work. However, accrual isÂ capped at 40 hours per year and 64 hours in total. Employers are responsible for updating employees with statements showing their available sick and safe leave.
Meanwhile, employers with 14 or fewer employees are required to grant unpaid sick and safe leave for certain employees.
Eligible reasons for leave include:
- Caring for or treating the employeeâs mental or physical illness, injury, or condition
- Obtaining preventative medical care for the employee or their family member
- Caring for a family member with a mental or physical illness, injury, or condition
- Maternity or paternity leave
- Obtaining medical or health services, legal proceedings, or relocating residence related to instances involving domestic violence, sexual assault, or stalking against the employee or their family member
Employers in Montgomery County must abide by separate PTO legislation. The key difference is that annual accrued sick leave can reach 56 hours instead of 40, and that employers with fewer than five employees are only required to provide 32 hours of paid sick and safe leave (plus an option for 24 hours of unpaid leave).
Marylandâs Healthy Employee Act, also referred to as the Shift Break Law, provides stipulations for employers to provide breaks for employees in certain scenarios. Notable exceptions include the following:
- Employees covered by a collective bargaining agreement with shift breaks that equal or exceed Maryland laws
- Employees exempt from overtime pay under the Fair Labor Standards Act
- Employees working at least four consecutive hours at a business location with five or fewer employees.
Eligible employees should be allocated the following break times per hours worked:
- 4-6 consecutive hours: 15 minute break
- More than 6 consecutive hours: 30 minute break
- 8 or more consecutive hours: 30 minute break plus a 15 minute break for every additional 4 consecutive hours worked
Generally speaking, a 15-minute break should constitute paid time under the Fair Labor Standards Act, whereas employers are not required to pay employees during 30-minute meal breaks.
Child Labor Laws
Maryland requires minors ages 14-17 to obtain work permits to legally work. The state also regulates the duration and type of work they may perform.
Any 14- or 15-year old employee may not work more than four hours daily or 23 hours weekly during the school year. When school is out of session, this increases to eight hours daily or 40 hours weekly.
Guidelines for 16- and 17-year old employees are a bit more complicated. For instance, they cannot spend more than 12 combined hours at work and school in a given day. They must also be allowed eight consecutive hours of free time between school and work obligations. Finally, they cannot work more than five hours straight without a 30-minute break at minimum.
Additionally, minors may not be employed in industries involving hazardous materials and heavy machinery, such as mining and meatpacking.
Maryland has legislation regulating the frequency employees are paid, but there is some flexibility. Employers can follow a weekly, biweekly or semimonthly pay period, though monthly can be possible in certain scenarios. If a payday coincides with a holiday, employers need to pay their employees on the last preceding business day. Employees have the right to be paid in cash, check, or direct deposit depending on their preferences.
In the event that an employee is fired or quits on their own accord, employers are responsible for paying them by the next scheduled payday. Itâs also worth noting that Maryland does not require employers pay employees for unused sick or vacation leave if terminated.
Employers in Maryland do not have to offer disability insurance unless they have 15 or more employees. These large employers must comply with the Americans with Disabilities Act, which is a federal requirement rather than a state mandate.
Worker’s Compensation Insurance
Any employer in Maryland with one or more employees is required to provide workerâs compensation insurance for their employees. This insurance covers costs related to employee injuries that occur while working. Employers may not deduct a portion of the cost from insured employeeâs wages.
In Maryland, employers may purchase workerâs compensation insurance from an appropriately licensed private insurance company or the non-profit Chesapeake Employers Insurance Company. Itâs also possible to apply to become self-insured as an employer.
How State Of Maryland Payroll Works
Now that weâve covered Marylandâs various taxes and regulations, itâs time to tackle payroll for your small business employees.
Step 1: Make Sure You’re Following All Maryland Payroll Laws
Making sure youâre in compliance with the aforementioned Maryland labor laws and regulations is an important first step before completing payroll. Otherwise, you could leave yourself liable to fines, misdemeanors, and criminal charges.
- Failing to obtain worker’s compensation insurance can result in a fine up to $10,000.
- Any employer who fails to file income tax returns or remit amounts collected as required is subject to a penalty up to 25% of the unpaid tax.
Step 2: Have the Proper Employee Documentation
Now that they meet the regulations, to process payroll, Maryland business owners will need to make sure they have the proper documentation for their employees (i-9s, W-4s, etc.).
Once youâve double-checked that your business is abiding by Maryland labor laws, itâs time to compile key employee documentation to get started with payroll.
- I-9: This form is used to verify an employeeâs identity and eligibility to work in the U.S.
- MW507: This form designates how much employers should withhold from employees for Maryland and local income taxes.
- W2: This form is a wage and tax statement that employers must send to employees and the IRS at the end of the year.
- W4: This form must be completed by new employees and returned to their employers to ensure their first paycheck is accurate.
Step 3: Calculate Your Employee’s Pay
If your small business has just a few hourly employees, calculating employee pay yourself may be a feasible and cost-effective option. Remember that youâll need to account for tips, commission, PTO, and overtime if applicable in addition to salaries and hourly wages.
If youâre strapped for time or have many employees, there are options for small business payroll software that can streamline the process.
Step 4: Deduct Federal & State Payroll Taxes
Next they’ll need to deduct federal and state payroll taxes. Use a bullet point list to recap each item they’ll need to deduct (FUTA, state income tax, unemployment, etc.)
After youâve calculated employee gross pay, youâll need to make the appropriate deductions for federal and state payroll taxes. There is a lot to remember here, so consider keeping the following list handy to make sure you donât omit anything.
- Federal Income Tax: An employee’s W4 information will determine withholdings.
- Federal Unemployment Tax: As of 2020, a tax rate of 6% applies to an employeeâs first $7,000 in annual wages. Thus, this tax is capped at $420 per employee.
- Social Security: A flat tax rate of 6.2% for wages up to $137,700 in 2020.
- Medicare: A flat tax rate of 1.45%, though employees earning more than $200,000 receive an additional 0.9%
- State Income Tax: Statewide rate between 2-5.75% depending on income, plus a flat county or city tax rate of 2.25-3.2% depending on location.
- Supplemental Income Tax: Ranges from 3.2% to 8.95% on bonuses, commission, and severance pay.
- Unemployment Tax: Ranges from 0.3% to 7.5% and applicable to the first $8,500 in wages.
Step 5: Process Payroll
Taking out deductions and withholdings from employeesâ pay leaves you with their net pay, which is the dollar amount that will appear on their paycheck. Payroll software can help with this stage of the payroll process too by printing checks and making direct deposits.
Step 6: Don’t Forget To Keep Records
Processing payroll to pay employees on time is important, but youâre not out of the woods just yet. Youâll need to submit payroll records to Marylandâs Revenue Administrative Division and IRS, so itâs worth creating a system to save relevant information and documentation. For instance, youâll want to keep track of employee information and their earnings, even if they are fired or quit.
Maryland requires employers to submit payroll information electronically via the Employer Payroll Data Reporting Application. At the beginning of each fiscal year, be sure to submit the contact information for all parties responsible for completing payroll to the Maryland State Retirement and Pension System (MSRA)
Maryland Payroll Tax Resources
There are a lot of factors to keep in mind when it comes to completing payroll in Maryland. Rest assured that practice and creating a system that works for your small business will help you stay on top of your payroll obligations. For further reading and information, check out our list of Maryland tax resources:
- Maryland Minimum Wage and Overtime Law
- The Healthy Employee Act
- Maryland Income Tax Rates
- Unemployment Insurance Tax Rate (2020)
- Maryland Employer Withholding Guide
- Maryland Earned Sick and Safe Leave
- Maryland Department of Labor Minor Factsheet
- Submitting Payroll
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