Understanding Maryland LLC Taxes: A Guide for Owners Paying State and Federal Taxes
To help you understand the process of filing taxes in Maryland, we partnered with our licensed LLC accountants and attorneys with over eleven years of experience in the industry.
We went through the Maryland Secretary of State's website for over five weeks and compiled important details concerning LLC taxes.
Read along for guidance on how to file your Maryland LLC taxes.
Quick Summary
- LLCs in Maryland are "pass-through" tax companies; the individual LLC members must pay the income taxes instead of the LLCs themselves.
- LLC owners must pay sales tax, self-employment tax, and payroll tax to the state and IRS.
- The state tax rate in Maryland ranges between 2-5.75% depending on the revenue you produce through your LLC.
- It is important to register for various tax accounts to comply with state and federal tax obligations, especially for businesses with employees.
How Are LLCs Taxed in Maryland?
LLCs in Maryland are taxed based on the number of members. Also, by default, these entities are handled as pass-through businesses.
Instead of paying taxes at the entity level, LLCs pass revenue on to members, who pay state income taxes on their part of the income.
The number of LLC members will determine the default tax status for your Maryland LLC.
Multi-member LLCs are treated as partnerships, but single-member LLCs are taxed as disregarded entities (much like sole proprietorships).
If you are filing under default status, you must submit your federal taxes using one of the following forms each year:
- Form 1040 (typically Schedule C, however, some SMLLCs file C-EZ, E, or F) for a single-member LLC [1].
- Form 1065 for a Multi-Member LLC [2].
As an LLC, you can file as an S-corp or a C-corp, which will vary the filing requirements when you pay income taxes.
State Taxes for Maryland LLCs
Maryland taxes LLCs based on the income allocable to the state. This means that corporations and associations with income allocable to the State of Maryland are required to file tax returns.
Maryland's competitive corporate tax rate compared to surrounding states makes it a favorable option for businesses.
1. Single-Member LLCs
The IRS considers all single-member LLCs to be disregarded entities for tax purposes. This implies that the IRS does not anticipate the LLC filing its own federal corporation income tax return.
Instead, the single-member LLC's owner submits the form.
The owner of the LLC determines how the LLC pays federal income tax:
- If one individual owns the LLC, it is taxed as a sole proprietorship.
- If another firm owns the LLC, it is taxed as a division/branch of the parent company.
If you own a single-member LLC and choose to pay state taxes at the entity level, you will pay 8%, the sum of the highest state individual income tax rate (presently 5.75%) and the lowest county individual income tax rate (presently 2.25%).
2. Multi-Member LLCs
If an LLC has several owners, it is taxed similarly to a partnership LLC. If a multi-member LLC does not opt to be taxed as a C or S corporation, the IRS will regard the LLC as a partnership by default.
The LLC must file a 1065 Partnership Return and provide the LLC owners with a Schedule K-1.
The Schedule K-1s show the distributive portion of profits for each owner. Furthermore, the K-1 income "flows through" to the owners. Each owner will then pay income tax on their personal income tax return (Form 1040).
3. LLCs Taxed as S-Corp
S-corp is a tax classification offered to both corporations and limited liability companies.
S-corps, like LLCs, are taxed as pass-through corporations. Unlike LLC members, S-corp owners are not liable to the 15.3% self-employment tax on dividends received (but S-corps must pay self-employment tax on wages).
If your LLC fulfills the IRS's S-corp standards, you can convert your LLC election status to S-corp for tax reasons by completing Form 2553 [3].
If you file under default or S-corp status, individual income tax is due in Maryland. The Maryland state income tax is progressive, with rates ranging between 2% to 5.75%.
The Maryland income tax rate is applied to any sum that exceeds the lowest dollar number in your taxable income range. If you earn $1,500, you are in the $1,000-$2,000 category and will pay 3% on $500. You will, however, be required to pay a fixed fee that may vary depending on your income range.
So, if you earn $1,500, you'll pay 3% on $500 plus $20.
Before making the conversion to S-corp status, we recommend speaking with a certified accountant to ensure that it will benefit your firm financially.
Use Form 1120-S to submit your taxes as an S-corp [4].
4. LLCs Taxed as C-Corp
LLC owners can elect to have their firms taxed as a corporation if they want. C-corps must pay 8.25% Maryland corporate income tax and the 21% federal company tax.
"C-corp filing status offers LLCs the eligibility for additional tax deductions and is more appealing to investors."
- William Sinclair, Business Lawyer
Filing LLC taxes as a C-corp is substantially more complex than filing LLC business taxes as a sole proprietor; therefore, consult with an accounting expert before adopting C-corp status.
Federal Taxes for Maryland LLCs
If you have an LLC in the United States, you must pay federal self-employment taxes and federal income taxes regardless of where your firm is situated. These taxes are included on Form 1040.
1. Federal Income Taxes
Your tax bracket will determine your federal income taxes, but the cutoffs for individual tax brackets, and the percentage owing, will vary from year to year.
2. Federal Self-Employment Taxes
It makes no difference whether your LLC has one or more members; all LLC members must pay self-employment tax on their portion of the LLC's revenues.
The rate of self-employment taxation is 15.3%.
Related Articles:
- How to Set Up an LLC in Maryland
- Premium LLC Formation Services in Maryland
- Professional Registered Agent Services in Maryland
Other Taxes
As a Maryland company owner, you should be aware of the following taxes:
1. Maryland State Employer Taxes
If your LLC hires any employees, you must pay employer taxes like unemployment insurance (UI) tax and enroll in workers' compensation insurance.
Here's a quick rundown:
- Unemployment Insurance (UI) Tax: In Maryland, UI tax is levied on the first $8,500 paid to each employee. Most new employers pay 2.3% in UI taxes, whereas the usual employer pays 10.50%. The Department of Labor's BEACON 2.0 portal allows you to register and determine your UI tax rate.
- Workers' Compensation: If you've got one or more employees, you must offer workers' compensation insurance to them. If you obtain clearance from the Maryland Workers' Compensation Commission, you can acquire coverage from a private insurer or self-insure.
2. Local Maryland Taxes
All 23 counties in Maryland, as well as Baltimore City, impose a local income tax. Depending on the jurisdiction, the local income taxes range from 2.25% to 3.2%.
In addition to income tax, you may be required to pay personal property tax and other municipal taxes, such as the Beverage Container Tax imposed by Baltimore City.
Check with your municipality to see which local taxes apply to you and your LLC.
3. Industry Taxes
Doing business in some industries may need the payment of additional Maryland taxes, like:
- Boxing & Wrestling Tax
- Digital Advertising Gross Revenues Tax
- Motor Fuel Tax
- Admissions & Amusement Tax
- Tobacco Tax
4. Personal Property Tax
In Maryland, personal property tax is levied on businesses that own or lease personal property, such as equipment, vehicles, and real estate.
Each year, businesses must file a personal property tax return with the Maryland Department of Assessments and Taxation (SDAT).
This return requires a detailed list of all personal property owned or leased by the business, along with its assessed value.
The tax rate for personal property varies depending on the location and type of property.
Businesses with personal property valued at $20,000 or more must complete a Business Personal Property Tax Return (PPR).
This return can be filed online through the Maryland Business Express (MBE) portal or by mail.
Additionally, some businesses may need to submit a Corporate Diversity Addendum along with their report.
5. Sales and Use Taxes
In Maryland, businesses that sell taxable goods or services are required to collect and remit sales and use taxes.
The standard sales and use tax rate is 6% of the gross receipts from sales.
Businesses must file sales and use tax returns periodically, with the frequency of filing depending on the amount of sales tax collected.
To comply with Maryland sales tax regulations, businesses must register using the Maryland Combined Registration Application (CRA) and obtain a sales and use tax license from the Comptroller of Maryland.
Certain sales, such as those related to healthcare and education, may be exempt from sales and use tax.
Annual Report and Tax Filing Requirements
Maryland LLCs are required to file an annual report with the SDAT. This report provides information about the LLC’s business activities, ownership structure, and financial condition.
The annual report must be filed online through the Maryland Business Express (MBE) portal or by mail.
The deadline for filing the annual report is April 15th each year, with a 60-day extension available at no additional cost.
As of 2023, the filing fee for the annual report is $300. In addition to the annual report, LLCs must file Form 510 with the Comptroller of Maryland for income tax purposes.
Timely filing of the annual report and income tax forms is crucial to avoid penalties and ensure compliance with Maryland business regulations.
What Is Tax-Deductible for an LLC in Maryland?
The tax-deductible for an LLC in Maryland includes itemized deductions, child care deductions, first-time homebuyer savings deductions, and unemployment compensation deductions.
Other possible tax-deductible for Maryland include:
- Adoption Expenses Deduction: Taxpayers who adopt a baby through a public and nonprofit agency may deduct up to $5,000 in expenditures. Taxpayers who adopt a special-needs kid can deduct up to $6,000 in expenditures.
- College Savings Deduction: Taxpayers who donate to a Maryland College Investment Plan account may deduct up to $2,500 per beneficiary. You can deduct up to $2,500 per contract if you bought advanced tuition payments to the Maryland Prepaid College Trust.
- Charitable Donation Deduction: Donations of a few disposable diapers and other personal hygiene items to charity organizations may be tax deductible.
FAQs
Do I Have To Pay an Annual Fee for My LLC in Maryland?
Yes, you have to pay an annual fee for your LLC in Maryland. This is distinct from the state, local, and federal taxes you pay.
How Do I Know My LLC Tax Classification in Maryland?
You know your LLC tax classification in Maryland by looking at the number of members in your LLC. This is because the IRS assigns an LLC's tax categorization based on its number of members (owners).
Do You Need Help Filling Your Maryland LLC Taxes?
If you operate a business in Maryland, paying taxes is crucial. For those new to the process, understanding the specific taxes you need to pay can be a challenge.
For this reason, we recommend integrating QuickBooks into your business tax filing procedure.
QuickBooks will help you organize and know the type of taxes you must complete. It will also simplify things for your small business and enable you to file your tax reports correctly and on time.
