How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Maryland, including state sales tax and self-employment, payroll and federal taxes. An LLC's profits aren't taxed at the business level like C Corporations. Instead, taxes are as follows:
State Taxes for LLCs
There are two main types of tax you'll pay to the Comptroller of Maryland: income and sales.
Maryland Income Tax
As a business owner, you'll need to pay Maryland income tax on any money you pay to yourself. These earnings flow through to your personal tax return. You'll be taxed at the standard rates for Maryland, and you'll get to apply regular allowances and deductions. Any salaried employees will also need to pay personal Maryland state income tax.
Depending on earnings, state income tax rates range from 2 to 5.75 percent. Counties may also levy income taxes on their residents.
Maryland also imposes residency requirements for income tax payment. All state income taxes are payable to the Comptroller of MD.
Maryland Sales Tax
If you sell physical products or certain types of services, you may need to collect sales tax and then pay it to the Maryland Comptroller. This tax is collected at the point of purchase. Maryland sales tax rates vary depending on the region, county or city where you're located.
Most states don't levy sales tax on goods that are considered necessities, like food, medications, clothing or gas. Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the MD Comptroller to confirm whether your business will be required to collect Maryland sales tax, and to make sure you pay the correct amount.
Sales tax rates do vary between states, counties and cities. Typically, the state will set a base sales tax rate, then specific counties and cities may levy small additional sales tax amounts on top of that.
Unlike many other states, Maryland has no franchise tax.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Maryland LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare and other benefits. It applies to all the earnings you withdraw from your business. The current self-employment tax rate is 15.3 percent.
You may deduct business expenses from your income when figuring how much self-employment tax you owe.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to ask to be treated as an S Corporation for tax purposes, provided the business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your Maryland LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for things such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers must collect and withhold payroll tax from their employees when they receive their salaries. You’ll withhold 7.65 percent of their taxable wages, and your employees will be responsible for 7.65 percent, totaling the current federal tax rate of 15.3 percent.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for your employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties for Your LLC
Depending on the industry you're in, your Maryland LLC may be liable for other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Estimated Taxes for Your LLC
Most Maryland LLCs will need to pay estimated taxes throughout the year, depending on the amount of income and profit you expect to make. The most common types of estimated tax are: