The Breakdown of Local and State Maryland Taxes

Compared to other states in the country, Maryland presents unique challenges when handling payroll taxes. 

The combination of a graduated state income tax and a mandatory local income tax system —different for each county and Baltimore City—adds more complexity than just federal payroll taxes. Your payroll team must pay close attention to these intricacies to ensure accuracy.

Getting the local tax right, based on where employees live, is key to avoiding risk. Errors result in penalties and extra work for the company. Payroll pros everywhere find multi-state taxes tough, and Maryland's setup makes it even trickier.

This guide helps simplify things. We'll break down Maryland's state individual income tax, its specific local "piggyback" system, and employer State Unemployment Insurance (SUI) duties. You'll also get practical info needed for accurate withholding.

What is the state income tax rate in Maryland?

The state income tax is the first layer to Maryland's payroll. 

Unlike flat-rate states, Maryland uses a progressive tax system. Think of it like steps: as taxable income increases, the rate on the next chunk of income also rises.

This means you don't use one flat percentage. Maryland has several income brackets, each with its rate. 

Currently, rates start at 2.00% and climb to 5.75% with income in excess for top earners of the highest threshold.

Check the official rate schedules from the Comptroller for the current year. Remember, the brackets differ based on filing status: single, married filing jointly, or head of household.

Calculating State Withholding

Knowing the brackets isn't enough for correct paycheck withholding. The process relies on the employee completing the Maryland Form MW507. You must use this state form—the federal income tax withholding W-4 that’s designed for the federal government won't work for Maryland withholding.

The calculation performed by your payroll system involves several steps. Generally, the process looks like this:

1. Take pay period wages and project them out for the year (annualizing).
2. Reduce this amount by the value of allowances claimed on Form MW507 for the employee and any dependent taxpayer exemptions claimed.
3. Figure the estimated annual state tax using Maryland's progressive brackets on the adjusted income.
4. Scale that yearly tax back down to get the withholding amount for that single pay period.

While payroll tax software handles the math, understanding the process shows why getting an accurate MW507 is essential. It's the foundation for proper state withholding.

How do Maryland’s local income taxes work?

After state tax, the next challenge in Maryland’s payroll system is the required local income tax. Often referred to as "piggyback" tax, employers are responsible for withholding this. Unlike federal income taxes, all 23 Maryland counties and Baltimore City impose their income tax rate on residents.

These rates aren't the same statewide—each local government sets its rate yearly, causing differences. Currently, rates generally range from 2.25% to 3.20%. The absolute key rule for employers is this: The correct local rate depends only on the employee's county (or Baltimore City) of residence, not where they physically work.

For example, someone living in Howard County but working in Anne Arundel County pays the Howard County income tax rate.

Accurate Jurisdiction Assignment

This residency rule sounds simple, but applying it correctly is difficult. The main challenge is accurately determining an employee's local tax jurisdiction based on their mailing address—USPS ZIP codes do not always align with county or Baltimore City tax boundaries.

It's common for one ZIP code to cover parts of different jurisdictions, especially near county lines. Relying only on the ZIP code could easily lead to assigning the wrong county and withholding the wrong local tax. An employee might also list a city name that applies to an unincorporated area, adding to the confusion.

PO Boxes don't confirm physical residency. Ultimately, companies are responsible for withholding the correct local tax.

Geospatial Accuracy

The most reliable method for assigning the correct local rate is to geocode.

This process converts a street address into precise map coordinates of latitude and longitude.

These coordinates are then checked against accurate digital maps of Maryland's official tax jurisdiction boundaries. This gives a definitive assignment to the correct county or Baltimore City, overcoming problems from vague city names or overlapping ZIPs.

Bracketed Local Rates

To add a bit more complexity, a couple of Maryland counties—currently Anne Arundel and Frederick—use bracketed local income tax rates. Like the state system, the local rate itself can change based on the resident's income level. 

Your payroll system must handle these tiered rates correctly for people living in those specific counties.

Employer Obligations—Maryland SUI Tax

Beyond income taxes, your Maryland payroll duties include managing the State Unemployment Insurance (SUI) tax. This tax is paid by the employer, not withheld from employees, representing employer portions of state payroll taxes. It funds the state's unemployment benefits program.

It helps to know how your SUI tax rate is set. Maryland uses an experience rating system, meaning your rate reflects your company's history with unemployment claims. It looks at benefits paid to your former employees compared to your taxable payroll over time.

New employers usually start at an industry-specific rate. Established businesses see rates adjusted annually based on claims history and the state UI fund's balance. Familiarize yourself with the current SUI taxable wage base (the annual wage limit or cap per employee for this tax) and the potential range of SUI rates.

You'll mainly handle SUI through the BEACON system, Maryland's online portal for unemployment insurance. This is where you file mandatory quarterly wage reports and make tax payments that make up your employer contributions.

Maryland also allows voluntary contributions—making an extra payment by the deadline might lower your SUI rate for the next year, potentially saving you money.

Withholding Process and Cross-Border Rules

Now that we've covered the tax types, let's look at the practical steps for setting up withholding, especially when employees work across state lines.

Accurate Maryland withholding starts with the employee completing Maryland Form MW507. This state form is where the employee declares allowances, directly impacting the tax calculation—the federal W-4 isn't a substitute. Also, ensure your business is registered for employer withholding via the state's Combined Registration.

Maryland's location means frequent cross-border commuting. Fortunately, Maryland has reciprocal agreements with Pennsylvania (PA), Virginia (VA), West Virginia (WV), and Washington D.C., simplifying things. If your Maryland resident employee works in one of these places, you typically withhold only Maryland state and local taxes.

If an employee lives in PA, VA, WV, or DC but works physically in Maryland, they can be exempt from Maryland withholding. They must give you a valid Form MW507 with Part II (Certificate of Nonresidence) completed. With this form, you stop Maryland withholding and withhold for your home state instead.

Crucially, remember the Delaware Exception. Maryland has no reciprocity with Delaware. A Delaware resident working physically in Maryland is subject to Maryland state withholding and the specific nonresident local income tax rate, usually requiring tax filings in both states.

What is the combined state and local sales tax rate in Maryland?

Let's briefly touch on sales tax in Maryland, which is simpler than its income taxes. Maryland applies a single, statewide sales tax rate of 6%.

Importantly, Maryland does not allow local governments (counties or cities) to add their own sales taxes. The rate you pay on taxable items is consistently 6% everywhere in the state. Thus, the "combined" state and local rate is simply 6%.

Are groceries, clothing, or prescription drugs taxed in Maryland?

Maryland exempts several common purchases from this 6% sales tax. Generally, most grocery food items for home preparation are not taxed. Prescription drugs and certain medical supplies are also typically exempt.

However, clothing and footwear are generally taxable at the 6% rate in Maryland, unlike in some nearby states. Sales tax is collected at the point of sale by the vendor and isn't part of your employer payroll withholding duties.

What are Maryland’s property tax rates, and how do they differ by county?

Property tax is another key part of Maryland's tax system, but it works differently from local and federal payroll taxes. Property taxes are fundamentally a local function. They are imposed and collected by individual counties and Baltimore City, meaning rates vary significantly across Maryland.

The Maryland Department of Assessments and Taxation (SDAT) assesses property values, usually every three years. Local governments then apply their tax rates to these assessed values. Because each jurisdiction sets its rate based on local needs, property tax burdens differ greatly depending on location.

Maryland offers programs like the Homestead Tax Credit to limit increases in taxable assessments for eligible homeowners. However, property taxes are the responsibility of the property owner. They are entirely separate from your payroll withholding obligations as an employer.

Conclusion

Maryland payroll demands attention, given its mix of progressive state taxes, required local taxes varying by county based on residency, SUI contributions, and specific reciprocity rules. Handling all this accurately, especially getting the local tax right for each employee across 24 jurisdictions, is the biggest challenge.

Maintaining accuracy and avoiding penalties often require more than what manual checks alone can guarantee. Investing in capable payroll systems with precise location tools (using geospatial features) and automated tax engines is key for solid risk management for business owners and payroll teams. Technology like Symmetry's offers a reliable way to handle Maryland's tricky details confidently.

We suggest reviewing your current Maryland process, especially for local tax assignment. Consider how modern tech can help you stay compliant and make your work easier.