Operational Gaze:
How to Run Payroll in Maryland?

April 9th 2024

Are you an employer or employee in Maryland looking to understand the intricacies of running payroll in this picturesque Mid-Atlantic state? Navigating payroll processes can be complex, with specific regulations unique to Maryland. This comprehensive  guide aims to demystify these procedures, ensuring compliance and efficiency. So, without further ado, read on.

This Article Covers

Laws That Affect Payroll Procedures in Maryland
Worker Classifications in Maryland
Payroll Forms and Relevant Bodies in Maryland
Applicable Taxes in Maryland
Key Pay Elements That Impact Payroll in Maryland
Step-by-Step Guide to Payroll in Maryland

Laws That Affect Payroll Procedures in Maryland

Maryland Laws

  • Maryland Income Taxes: Maryland employs a progressive income tax system, with rates ranging from 2% to 5.75% based on income. Additionally, Maryland’s 23 counties and the City of Baltimore levy separate income taxes, varying from 2.25% to 3.2%. Employers are obligated to withhold these state taxes from employees’ wages, accurately reflecting local tax rates.
  • Maryland Supplemental Income Tax: This law applies to additional income such as bonuses, severance pay, and commissions. These are subject to a supplemental tax with rates between 3.2% and 8.95%. Employers must ensure appropriate tax rates are applied to these types of income, accurately and consistently, as they differ from regular income tax rates.
  • Minimum Wage Law: Maryland’s minimum wage as of 2024 is $15.00 per hour. This exceeds the federal minimum wage. Employers must also display posters outlining minimum wage and overtime laws. Notably, minimum wage can vary by county, reflecting local economic conditions.
  • Maryland Tipped Workers: Employees earning over $30 per month in tips must be paid in accordance with Maryland’s minimum wage rates. Employers can use a tip credit for up to $3.63 of the hourly rate. Those using tip credits must provide employees with detailed wage statements each pay period, including information on hourly rates and additional tips​​​​.
  • Maryland Unemployment Tax: The unemployment tax rate in Maryland varies from 1% to 10.5%, depending on an employer’s experience with benefit charges and taxable payroll. On the other hand, newly established businesses automatically pay a 2.3% rate. This tax is essential for supporting the state’s unemployment benefits system, ensuring financial aid during job loss.
  • Maryland New Hire Reporting: Employers must report new or rehired employees (after a 90-day unpaid absence) to the Maryland State Directory of New Hires. This excludes immediate family members and employees earning less than $1,000 per quarter. The report must include detailed employer and employee information. Failure to report can result in fines up to $500.
  • Maryland PTO Policy: Employers with 15 or more employees must provide paid sick and safe leave. Eligible employees accrue one hour of leave per 30 hours worked, capped at standard 40 hours per year and 64 hours in total. Smaller employers must provide unpaid leave. Regular updates on available leave are mandatory to ensure employee awareness and proper utilization.
  • Maryland Payment Obligations: Employers have flexibility in setting pay periods (weekly, biweekly, semimonthly) but must pay employees by the next scheduled payday if they quit or are terminated. There is no need for payment for unused sick or vacation leave upon termination​​.
  • Worker’s Compensation Insurance: Employers must provide worker’s compensation insurance, covering injuries incurred while working. This insurance cannot be funded by deducting from employees’ wages. Employers can choose from private insurance companies or the non-profit Chesapeake Employers Insurance Company, or apply to become self-insured​​.
  • Overtime Laws: Most employees must be paid 1.5 times the hourly rate for work exceeding 40 hours per week. Exceptions include bowling establishments and care institutions (excluding hospitals) for work over 48 hours, and agricultural workers for over 60 hours per week​.

Federal Laws

As compared to state-mandated laws, federal laws provide a nationwide framework for payroll procedures that must be adhered to by employers in Maryland and across the United States.

  • Fair Labor Standards Act (FLSA): The FLSA is a federal law that sets standards for minimum wage, overtime pay, recordkeeping, and youth employment. As of the last update, the federal minimum wage is $7.25 per hour, although employers in Maryland must comply if state minimum wage laws dictate a higher amount. Overtime must be paid at a rate of at least one and one-half times the employee’s regular rate for hours worked beyond 40 in a workweek.
  • Family and Medical Leave Act (FMLA): The FMLA sets out provisions for leave entitlement. Eligible employees have the right to take up to 12 weeks of unpaid leave for events such as childbirth, adoption, or the care of a family member with a serious health condition.
  • Federal Insurance Contributions Act (FICA): The FICA requires that employers deduct Social Security and Medicare taxes from paychecks and also make a matching contribution. As of the current information available, the Social Security tax rate was 6.2% for the employer and 6.2% for the employee on earnings up to the applicable taxable maximum amount. Medicare tax was 1.45% each for both employer and employee, with an additional 0.9% for high earners.
  • Federal Unemployment Tax Act (FUTA): FUTA imposes a federal payroll tax on employers to help fund state unemployment agencies. Employers pay this tax annually, and it is calculated at 6% of the first $7,000 paid to each employee as wages during the fiscal year. Significantly, employers can receive a credit of up to 5.4% for making timely and full payments of state unemployment taxes, effectively reducing the FUTA rate to a more manageable 0.6%.

HR Laws

  • Time to Care Act (Paid Family and Medical Leave): The Maryland Time to Care Act law, which focuses on paid family and medical leave, enables employees to avail up to 12 weeks of paid leave, potentially 24 weeks in specific situations, under a state-managed insurance-like program. Recent amendments have postponed its start, setting contribution commencement to October 2024 and benefits beginning January 2026. Contributions are evenly split between employees and employers, with an employer’s share capped at 1.2% of an employee’s wages.
  • Non-Compete Agreement Salary Threshold: Maryland’s Senate Bill 591 restricts non-compete agreements for employees earning below $19.88 per hour or about $41,350 annually. This law aims to protect lower-wage workers from restrictive employment clauses, ensuring greater job mobility. The threshold is set at over 150% of the state’s minimum wage, reflecting a significant increase from previous limits and affecting a broader range of employees.
  • Maryland Income Tax Withholding: Employers in Maryland are required to withhold state income taxes from employees’ wages (2% to 5.75%), based on the employee’s income level. Additionally, Maryland’s 23 counties and Baltimore City impose local income taxes, ranging from 2.25% to 3.2%, which also require employer withholding. This system necessitates employers’ diligence in accurately reflecting both state and local tax rates in payroll procedures.
  • Maryland Supplemental Income Tax: Maryland law stipulates that additional forms of income like bonuses, severance pay, and commissions are subject to supplemental income tax. The rates for this tax vary between 3.2% and 8.95%, depending on specific circumstances. Employers must ensure that these income types  are taxed accurately, applying the supplemental tax rates distinctively from regular income tax rates to comply with state tax regulations.

Worker Classifications in Maryland

In Maryland, the classification of workers as either employees or independent contractors is a significant issue that affects various legal and financial aspects for both workers and employers.

Employees and Independent Contractors

  • Definition and Distinction: In Maryland, workers are generally classified into two categories: employees and independent contractors. This classification is vital as it determines the application of wage and employment laws, including entitlements such as minimum wage, overtime pay, unemployment benefits, workers’ compensation benefits, and more​​.
  • Misclassification Consequences: Misclassifying employees as independent contractors can lead to legal and financial repercussions. Employers who misclassify to reduce costs avoid paying certain taxes and insurance premiums. Misclassified workers lose out on benefits like paid leave, health insurance, and retirement benefits. The Maryland Workplace Fraud Act particularly focuses on the construction and landscaping industries for such misclassifications​​.

Modified ABC Test

The “ABC Test” is used in Maryland for determining the worker classification, particularly for the Workplace Fraud Act and Unemployment Insurance law. It presumes a worker is an employee unless certain conditions are met​​. The test includes three criteria: (A) the worker must be free from control, (B) the worker must be engaged in an independent business or profession of the same nature as the work performed, and (C) the work must be outside the usual course of the employer’s business or performed outside of all the employer’s places of business​​.

Right to Control

In addition to the ABC Test, the status of a worker is also determined by the “economic reality” of the work relationship. This focuses on whether the worker is economically dependent on an employer who can control the opportunities. A worker agreeing to be an independent contractor does not establish that fact if the economic reality suggests an employer-employee relationship​​.

It’s important to note that the ‘Right to Control’ is a crucial factor in this thorough assessment. It meticulously examines the degree of control an employer has over both the work performance and operational aspects of the worker’s role. The essence is that a mere contractual declaration isn’t sufficient to classify a worker as an independent contractor if the practical dynamics of the relationship clearly demonstrate an inherent employer-employee dependency.

To learn more about the rights of salaried and hourly employees, read our guides on your rights as a salaried employee in Maryland and your rights as an hourly employee in Maryland.

Payroll Forms and Relevant Bodies in Maryland

Maryland Payroll Forms

  • MD MW507: The Maryland MW507 form is a withholding exemption certificate used by employees in Maryland to determine state income tax withholding amounts. This form helps employers calculate the correct state tax to withhold from employee paychecks based on personal exemptions and dependents. It’s essential for employees to update this form for accuracy in tax withholding, especially after life events like marriage or the birth of a child.
  • MD MW507M: This Maryland MW507M is specifically for qualified civilian spouses exempt from Maryland withholding tax. It’s used by civilian spouses of military personnel when they are exempt from Maryland state income tax under the Military Spouses Residency Relief Act. It’s important to note that this exemption only applies when the civilian spouse is in Maryland solely to be with the military spouse and maintains a legal residence in another state in the USA.
  • Direct Deposit Authorization Form: The Direct Deposit Authorization Form in Maryland is used by employees to set up or change the relevant direct deposit information. It allows for the speedy electronic transfer of payroll funds into an employee’s bank account, providing a convenient and secure method of receiving pay. This form is vital for employees to ensure accurate and timely deposit of wages and to avoid potential issues with lost or delayed checks.
  • CPB 311-T (Special Payments Payroll Authorization Form): This form is utilized for authorizing special payroll payments. It’s used by employers in Maryland to process payments outside the regular payroll cycle, like bonuses, commissions, or other one-time payments. This form ensures that special payments are accurately recorded and processed in compliance with Maryland’s payroll regulations, providing clarity and transparency in employee compensation.

Federal Payroll Forms

Alongside Maryland-specific documentation, federal payroll forms are equally important:

  • Form W-4 (Employee’s Withholding Certificate): The Form W-4, or Employee’s Withholding Certificate, is a federal document that employees across the United States fill out to inform employers about how much federal income tax should be withheld from the wages. The Form W-4 takes into account various factors like marital status, dependents, and additional income to tailor the withholding to the employee’s unique tax situation. With periodic updates, especially after major life events or changes in financial circumstances, the W-4 ensures that employees neither overpay nor underpay the federal income taxes throughout the year.
  • Form W-2 (Wage and Tax Statement): Employers use the Form W-2, known as the Wage and Tax Statement, to report the annual wages paid to each of their employees and the specific amount of taxes withheld. This federal form, issued to every employee before the end of January each year, is vital for individuals when preparing their personal income tax returns. For the employee, it offers a clear summary of their earnings and tax withholdings, while for the IRS, it serves as a record of the individual’s employment-related earnings and tax obligations.
  • Form W-3 (Transmittal of Wage and Tax Statements): The Form W-3 is basically a document used by employers to submit the total of all W-2 forms to the Social Security Administration. This form summarizes the total earnings, Social Security wages, Medicare wages, and withholding for all employees for the year. The W-3, which must accompany the W-2 forms, is an essential tool for the SSA to verify an employee’s income and tax information.
  • Form 940 (Federal Unemployment Tax Act Return): Form 940 is a federal form that employers utilize to report annual Federal Unemployment Tax Act (FUTA) tax. This tax provides funds for state unemployment agencies and supports unemployed workers. The form calculates the employer’s federal unemployment tax liability, considering any state unemployment tax they’ve already paid. By accurately completing and submitting this form, employers contribute to a system that offers financial support to individuals during periods of joblessness.
  • Form 941 (Employer’s Quarterly Federal Tax Return): Used by employers, Form 941, titled the Employer’s Quarterly Federal Tax Return, reports the wages they’ve paid and the corresponding taxes withheld every quarter. It captures details related to federal income tax, Social Security, and Medicare withholdings. By submitting this form quarterly, employers maintain a consistent record with the IRS, ensuring they meet tax obligations as required.
  • Form 944 (Employer’s Annual Federal Tax Return): Designed for smaller employers, the Form 944 allows them to report income and FICA taxes withheld from employees’ paychecks just once a year instead of quarterly. This form simplifies the reporting process for eligible small businesses by reducing the number of times they must submit tax withholding information, easing the administrative burden and allowing them to focus on running their business.
  • Form 1099 (Miscellaneous Income): The 1099 forms are a series of documents the IRS uses to account for various types of non-employment income. There are many different types of 1099 forms, but one of the most common is the 1099-MISC, which is given to independent contractors or freelancers to report payments made to them for services rendered in the course of trade or business. This form is critical for the IRS to track income that might otherwise go unreported and for contractors to accurately report their income and calculate the taxes.

Federal and Maryland Payroll/Tax Bodies

  • Comptroller of Maryland: The Comptroller of Maryland is the primary tax collection agency in the state which is basically responsible for collecting income taxes, including withholding tax and supplemental income taxes. Employers must report and remit these taxes to the Comptroller, ensuring compliance with state tax laws. This agency plays a crucial role in maintaining the state’s fiscal health by managing tax collections and enforcing tax laws.
  • Maryland Department of Labor, Division of Unemployment Insurance: This department administers the unemployment insurance program in Maryland. For example, it oversees the collection of unemployment taxes from employers, which are used to fund unemployment benefits for eligible workers. Employers must report their payroll and pay unemployment taxes to this department based on their experience rating and other factors.
  • Maryland Department of Labor, Division of Labor and Industry: The Maryland Department of Labor, Division of Labor and Industry enforces labor laws in Maryland, including those related to paid sick leave under the Maryland PTO policy. Employers must comply with the regulations set by this division to ensure workers receive their entitled paid leave benefits.
  • Maryland Workers’ Compensation Commission: This commission administers the state’s workers’ compensation program. Employers are required to provide workers’ compensation insurance and report any workplace injuries to this commission. This body ensures that workers are compensated for injuries or illnesses that occur during work.
  • Internal Revenue Service (IRS): The IRS stands as the United States’ primary federal tax authority. Its mandate covers the vast spectrum of federal tax matters, inclusive of payroll taxes. By providing regulatory guidelines, tax codes, and essential resources, the IRS facilitates nationwide tax compliance. It is important to note that both employers and employees rely on the IRS’s directives to understand their federal tax obligations and ensure adherence.
  • U.S. Department of Labor (DOL): Believe it or not, theU.S. DOL has a broad role, impacting various facets of employment across the nation. Among its chief responsibilities are the formulation and enforcement of wage and hour standards. The DOL ensures fair labor practices, safeguards employee rights, and fosters a balanced work environment. This guidance assists employers in aligning the operations with federal employment norms and standards.
  • Social Security Administration (SSA): The Social Security Administration (SSA) runs programs for retirement, disability, survivor benefits, and family support. They also assist people in signing up for Medicare. The SSA is also the government body responsible for issuing Social Security Numbers— crucial for employment, finances, and accessing government services.
  • Wage and Hour Division (WHD): The WHD is a part of the U.S. DOL, whose main job is to ensure employers follow labor standards to protect workers’ rights. The WHD enforces laws like the Fair Labor Standards Act (FLSA), which covers things like minimum wage, overtime pay, recordkeeping, and child labor rules. It also enforces other laws like the Migrant and Seasonal Agricultural Worker Protection Act, Employee Polygraph Protection Act, and the FMLA.

Applicable Taxes in Maryland

State Taxes

  • Maryland State Income Tax: Maryland imposes a progressive state income tax, with rates ranging from 2% to 5.75% based on the employee’s income level. Employers are responsible for withholding these taxes from employees’ wages. This efficient system ensures that state income tax is accurately collected from workers’ earnings, contributing significantly to state revenue and robustly funding various essential public services and initiatives throughout Maryland.
  • Maryland County Income Tax: In addition to the state income tax, Maryland’s 23 counties and the City of Baltimore levy their very own income taxes, ranging from 2.25% to 3.2%. These local taxes in the state are also withheld by employers and are determined based on the employee’s residence location. This tax is essential for funding local county and city services.
  • Maryland Unemployment Insurance Tax: Employers in Maryland pay an unemployment insurance tax, which crucially funds unemployment benefits. The tax rate varies from 1% to 10.5%, based on the employer’s detailed history with unemployment claims. New businesses have a standard rate of 2.3%. This important tax provides a vital safety net for workers who lose their jobs, ensuring financial support during transitional periods of unemployment.
  • Maryland Supplemental Income Tax: This tax specifically applies to additional income, like bonuses and commissions, with rates ranging from 3.2% to 8.95%. Employers are obliged to withhold this tax, ensuring that these types of earnings are accurately and fairly taxed. This supplemental tax aptly reflects the extra nature of such income compared to regular wages.

Federal Taxes

  • Federal Income Tax: Employers are obligated to withhold federal income tax from employees’ paychecks. The amount withheld is determined by the information the employee furnishes on Form W-4 and is calculated according to the IRS-provided tax tables. This tax is progressive, with the applicable rate escalating as the employee’s taxable income increases.
  • Social Security and Medicare Taxes (FICA): Both employers and employees are mandated to contribute to Social Security and Medicare through the Federal Insurance Contributions Act (FICA) tax. Employers are responsible for accurately withholding the specified amount from their employees’ wages and also for contributing a corresponding matching amount.
  • Federal Unemployment Tax Act (FUTA): Employers pay this federal tax separately from other taxes, and it is not withheld from employees’ wages. FUTA, working in conjunction with the state unemployment system, provides critical funds for workers who are unemployed.

Key Pay Elements That Impact Payroll in Maryland

Minimum Wage

As of 2024, minimum wage in Maryland is set at $15.00 per hour for all employees. This rate applies to all hours worked, ensuring fair compensation for employees. Employers must comply to avoid penalties. This wage provides a baseline for employee earnings, impacting overall payroll calculations and budgeting for businesses.

Overtime

In Maryland, employees working over the standard 40 hours in a workweek are entitled to overtime pay at 1.5 times the regular rate. This applies to most workers, though certain exemptions exist. Overtime impacts payroll by increasing labor costs for additional hours worked. Employers must accurately track hours to ensure compliance and proper compensation.

Pay Stub Laws

Maryland law requires employers to provide employees with a statement for each pay period detailing gross earnings, deductions, and net pay. This transparency helps employees understand their compensation and deductions. Non-compliance can result in penalties. These laws ensure clarity in payroll processing, aiding both employer and employee understanding.

Workers’ Compensation Insurance

Maryland mandates employers to carry workers’ compensation insurance, covering medical expenses and lost wages for work-related injuries or illnesses. It’s important to note that this insurance is a payroll consideration, impacting overall employment costs. It provides vital protection for both employer and employee against unforeseen workplace incidents.

Garnishments and Deductions

Employers in Maryland may need to withhold wages for court-ordered garnishments such as child support or tax levies. These deductions must be accurately calculated, documented, and remitted to the appropriate agency. Understanding garnishment laws is crucial for payroll compliance, avoiding legal repercussions, and ensuring employee rights are upheld.

Final Paycheck

In Maryland, departing employees must receive their final paycheck by the next regular payday. This includes compensation for all hours worked and accrued leave, if applicable. Timely and accurate final paychecks are crucial for compliance and maintaining a positive professional relationship. Employers should ensure smooth processing to avoid disputes and penalties.

Step-by-Step Guide to Payroll in Maryland

  • Step 1: Register Your Business: Before processing payroll,  register your business with the Maryland Department of Labor and obtain a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS). This step lays the groundwork for legal compliance and is necessary for facilitating state payroll tax payments and overall financial management.
  • Step 2: Collect Employee Documentation: Gather Form W-4 and Maryland State Tax Withholding Form MW507 from new hires to determine tax withholdings. Also, complete Form I-9 for work eligibility verification. Note that secure storage of these forms are essential.
  • Step 3: Establish a Payroll Schedule: Once done with the documentation, establish a pay schedule, adhering to Maryland’s requirement for at least bi-weekly payments for non-exempt employees. A regular pay schedule is key for employee budgeting and legal compliance.
  • Step 4: Compute Gross Pay: Determine gross pay for each employee, including wages, overtime, etc. Follow federal guidelines and ensure accurate calculations for tax purposes.
  • Step 5: Withhold Appropriate Taxes: Deduct federal, state, and local taxes based on W-4 and MW507 forms. Precise tax withholding is crucial to avoid penalties for underpayment.
  • Step 6: Remit Payroll Taxes: Regularly pay withheld taxes to federal and Maryland authorities. Adhering to payment deadlines is crucial to avoid fines and ensure compliance.
  • Step 7: File Payroll Reports: Submit regular payroll tax reports to federal and Maryland state agencies. This includes quarterly unemployment insurance reports. Timely and accurate reporting is mandatory for legal compliance.
  • Step 8: Prepare Year-End Documents: Issue W-2 forms and file them with the IRS and the state. These forms are necessary for employees’ tax filings and must be accurate and timely.
  • Step 9: Keep Accurate Records: Maintain detailed payroll records for at least three years as required by law. Proper record-keeping is crucial for audits, disputes, or regulatory inquiries.
  • Step 10: Update Your Knowledge Regularly: Stay informed about changes in federal and Maryland payroll regulations. Keeping up-to-date is vital for compliance with the law.

Final Thoughts

Managing payroll in Maryland can be a particularly challenging task. Employees must ensure they diligently adhere to Maryland’s strict payroll regulations. To simplify the often complex process of managing payroll, consider exploring our comprehensive list of the top 6 applications tailored to streamline payroll responsibilities in the USA. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the USA.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.

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