Md. Code Regs. 03.04.01.01

Current through Register Vol. 51, No. 24, December 2, 2024

Section 03.04.01.01 - Withholding of Tax at Source

A. Withholding Required.

(1) Every employer subject to the jurisdiction of this State making payment to resident individuals of this State of salaries, wages, or compensation for personal services, and every employer making payment to nonresident individuals of salary, wages, or compensation for personal services rendered in this State, shall withhold from payments subject to withholding and transmit to the Comptroller the tax, taking into consideration:

(a) The personal exemption claimed by a resident or a nonresident on Form MW 507 or other approved form; and

(b) For organizations that are exempt from taxation under § 501(c)(3) or (4) of the Internal Revenue Code, the credit against the amount of tax withheld and required to be paid to the Comptroller under Tax-General Article, §§10-704.7, 10-704.10, and 10-715, Annotated Code of Maryland.

(2) The credit under §A(1)(b) of this regulation does not affect the calculation of the tax to be withheld from payments subject to withholding and the resident or nonresident shall receive credit for the full amount of tax withheld.

(3) Every payor of a payment subject to withholding as provided in Tax-General Article, §10-908, Annotated Code of Maryland, shall withhold and remit to the Comptroller the tax.

B. Withholding Exemption Certificate.

(1) Who Shall File. Except as provided for in §C(1)-(4) of this regulation, an employee shall file with the employer at the time of employment, a withholding exemption certificate if:

(a) The employee's salary, wages, or compensation is subject to withholding; or

(b) The employee satisfies the conditions for tax exempt status as set forth in §C(2), (3), or (4) of this regulation, and the employee wants to claim exemption from the withholding taxes.

(2) Form to be Filed. An employee who is required to file a withholding exemption certificate shall file with the employer a Form MW 507 or other approved form.

(3) Information Required.

(a) An employee filing a Form MW 507 with the employer shall supply the following information:

(i) Name;

(ii) Home address;

(iii) Social Security number;

(iv) Number of exemptions and allowances claimed;

(v) Signature under oath; and

(vi) Date.

(b) In addition to the general information provided by §B(3)(a) of this regulation, an employee claiming exemption from withholding under §C(2) shall certify under oath that he or she is not domiciled and does not maintain a place of abode in the State and shall list his or her permanent address.

(c) In addition to the general information required by §§B(3)(a) and C(3) or (4), an employee claiming exemption from withholding under §C(3) or (4) shall file Form MW 507 annually with the employer not later than:

(i) The 15th day of February of the following year if the employee's income tax liability is determined on a calendar year basis; or

(ii) The 15th day of the second calendar month following the last day of the employee's tax year if §B(3)(c)(i) does not apply.

(4) Exemptions Allowed. An employee may claim on the withholding exemption certificate those personal and dependent exemptions provided for under Tax-General Article, §10-211, Annotated Code of Maryland.

(5) Additional Exemptions. An employee may claim an additional exemption for each exemption amount allowed for a taxable year under Tax-General Article, §10-211, Annotated Code of Maryland, of the excess of the total of estimated itemized deductions, alimony payments, allowable child care expenses, qualified retirement contributions, and business losses, over the standard deduction allowance.

(6) Lesser Number Allowed. An employee may claim on a withholding exemption certificate a lesser number of exemptions than that to which the employee is legally entitled but shall not claim a greater number of exemptions than those to which he or she is legally entitled.

(7) Additional Withholding. In addition to the tax required to be deducted and withheld, the employer and employee may agree that an additional amount be withheld from the employee's wages. The additional amount agreed upon shall be considered as tax required to be deducted and withheld.

(8) Increase in Exemptions. An employee may file a new withholding exemption certificate with the employer at any time if there is an increase in the number of exemptions to which the employee is entitled.

(9) Decrease in Exemptions. If, on any day during the calendar year, the number of withholding exemptions to which the employee is entitled is less than the number of exemptions claimed in the withholding exemption certificate then in effect, the employee shall file a new withholding exemption certificate with the employer within 10 days after the change occurs.

(10) More than One Employer. If a withholding exemption certificate is in effect with one employer, an employee is not entitled to claim the same withholding exemptions on any other certificate filed with another employer.

(11) Failure to File. If an employee does not file a withholding exemption certificate with the employer when required, the employer shall compute the amount of withholding on the basis of one exemption, the employee's personal exemption.

(12) Unpaid Tax Liability and Refund Intercept Request. The Comptroller may notify an individual's employer in writing that the individual employee has an unpaid tax liability or that the employee is subject to a tax refund intercept request. The employer shall compute the amount of withholding on the number of exemptions set forth in the notice. The number of exemptions is limited to the exemption allowed on the employee's prior year's return.

(13) Failure to File Income Tax Returns. The Comptroller may notify an individual's employer in writing that an individual employee has failed to file a required income tax return. The employer shall compute the amount of withholding on the basis of one exemption.

(14) Invalid Certificate. A withholding exemption certificate is invalid if:

(a) The withholding exemption certificate does not contain the information required in §B(3) of this regulation.

(b) The withholding exemption certificate contains false or fraudulent information; however, claiming a lesser number of exemptions than allowed may not be considered false or fraudulent.

(c) There is any alteration of, or unauthorized addition to, the withholding exemption certificate. An alteration is taking out any language by which the employee certifies the correctness of the certificate. An unauthorized addition is any writing on the certificate other than the entries required.

(d) The Comptroller notifies the employer in writing that the withholding exemption certificate is invalid.

(e) The withholding exemption certificate claiming exemption from withholding under §C(3) of this regulation has not been renewed annually as required under §B(3)(c) of this regulation.

(f) The withholding exemption certificate claiming exemption from withholding under §C(4) of this regulation is not accompanied by the Comptroller-required documentation showing your spousal status under the Service members Civil Relief Act, as amended by the Military Spouses Residency Relief Act, or has not been renewed annually as required under §B(3)(c) of this regulation.

(15) Effect of Invalid Certificate. An employer receiving an invalid withholding exemption certificate shall consider it a nullity for the purposes of withholding, and the employer shall compute the amount of withholding on the basis of a single person claiming only the employee's personal exemption.

(16) Submission of Withholding Certificate.

(a) An employer shall submit to the Comptroller a copy of a withholding exemption certificate which is received from an employee if:

(i) The total number of withholding exemptions claimed on the certificate exceeds 10;

(ii) The employee certifies that he or she is exempt from withholding under the Servicemembers Civil Relief Act, as amended by the Military Spouses Residency Relief Act;

(iii) The employee certifies that he or she is exempt from withholding because he or she had no income tax liability for the preceding year, expects to incur no liability in the current year, and the wages are expected to exceed $200 a week;

(iv) The employee certifies that he or she is a bona fide domiciliary of a state which has a written reciprocal agreement with Maryland exempting salary, wages, or other compensation from taxation; or

(v) The employer has reason to believe the certificate is incorrect.

(b) An employer shall submit a copy of any currently effective withholding exemption certificate (or make the original certificate available for inspection) upon request of the Comptroller.

(c) If the Comptroller finds that a withholding exemption certificate contains any materially incorrect statement, or the employee fails to furnish verification when requested to do so, the Comptroller shall notify the employer in writing that the certificate is invalid. Thereafter, the employer shall compute the amount of withholding on the basis of a single person claiming only the employee's personal exemption until the Comptroller advises the employer by written notice to withhold on the basis of any new certificate filed by the employee and revokes the prior written notice.

(17) Period During Which Withholding Exemption Certificate Remains in Effect. Except as provided in §B(14) of this regulation, a valid withholding certificate shall continue in effect until another valid withholding exemption certificate takes effect.

C. Withholding Not Required. Withholding of Maryland income tax is not required with respect to compensation, salary, or wages paid for personal services rendered or performed by:

(1) Nonresident individuals employed as seamen upon vessels engaged in oceanic and foreign trade or commerce while these vessels are within any of the ports of this State;

(2) A nonresident individual whose state of domicile has a written reciprocal agreement with Maryland exempting salary, wages, or other compensation from taxation;

(3) Any employee who has furnished a withholding exemption certificate Form MW 507 to his employer certifying that he:

(a) Incurred no income tax liability for the preceding taxable year; and

(b) Expects to incur no income tax liability for the current taxable year;

(4) A nonresident individual subject to the Service members Civil Relief Act, as amended by the Military Spouses Residency Relief Act:

(a) Whose spouse is a member of the armed forces present in Maryland in compliance with military orders;

(b) Who is present in Maryland solely to be with the military spouse;

(c) Whose domicile is in another state; and

(5) Out-of-state employees as defined under Public Safety Article, § 14-219, Annotated Code of Maryland.

D. Time and Place for Filing Returns.

(1) Every employer and payor subject to the withholding provisions shall make a return to the Comptroller on Form MW 506.

(2) The required return shall be filed on:

(a) A monthly basis;

(b) A quarterly basis;

(c) An annual basis; or

(d) A periodic basis.

(3) Monthly Basis. When the aggregate amount required to be deducted and withheld by the employer or payor for any quarterly period can reasonably be expected to be at least $700, the employer or payor is required to file the return and pay the tax monthly on or before the 15th day of the following month.

(4) Quarterly Basis. When the aggregate amount required to be deducted and withheld by the employer or payor for any quarterly period is less than $700, the employer or payor is required to file and pay the tax quarterly on or before the 15th day of the following month for each quarter, January-December.

(5) Annual Basis.

(a) General. Except as provided in §D(5)(b) of this regulation, when the aggregate amount required to be deducted and withheld by the employer or payor for any annual period can reasonably be expected to be less than $250, the employer or payor shall:

(i) File the return; and

(ii) Pay the tax annually on or before the last day of January immediately following the tax year.

(b) Professional Sports Teams. Each non-Maryland-based professional sports team that has not elected to file on a monthly or quarterly basis shall:

(i) File the return; and

(ii) Pay the tax annually on or before the last day of January immediately following the tax year.

(6) Periodic Basis.

(a) For purposes of §D(6) of this regulation, the term "payroll" means the period for which a payment of wages is ordinarily made by the employer to its employees.

(b) Every employer or payor who, in the preceding calendar year, was required to withhold at least $15,000 in Maryland withholding tax shall file withholding returns on a periodic schedule so that a return is filed within 3 business days following each payroll that causes the total accumulated tax withheld to equal or exceed $700.

(c) If an employer or payor begins to file on a periodic schedule, it shall file a return at least once every month even if no wages are withheld during the month unless the employer:

(i) Gives written notice that it no longer has employees; or

(ii) Paid less than $15,000 in Maryland income tax during the preceding calendar year.

(d) Waiver of Periodic Basis Filing Requirement.

(i) If an employer or payor submits to the Comptroller written documentation from the Internal Revenue Service showing that it is allowed to make federal withholding tax deposits on a monthly schedule, then the Comptroller may grant a waiver from the requirement in §D(6)(b) of this regulation.

(ii) The waiver shall allow the employer or payor to file the Maryland withholding tax return and pay the tax on a monthly basis for the remainder of the calendar year.

(iii) An employer or payor may annually apply to the Comptroller for a renewal of a waiver granted under §D(6)(d)(i) of this regulation, if the employer or payor remains eligible to make federal withholding tax deposits on a monthly schedule.

(7) Change in Quarterly Filing. If an employer or payor has become liable to a monthly return of withholding, the employer or payor shall continue on this basis until a request in writing to change to quarterly reports is filed and approved by the Comptroller. The request shall contain evidence that the tax withheld is less than $700 per quarter and will be less than that amount for the next 12 months. If an employer or a payor requests in writing for permission to change from a monthly return to a quarterly return on the ground that withholding has become less than $700 for each quarter, this change shall be permitted only at the beginning of a calendar year.

E. Year-End Reconciliation Return of Monthly, Quarterly, Annual, and Periodic Returns and Employer Withholding Returns.

(1) On or before January 31 of each year, the employer shall furnish to each individual who was employed during the preceding year Copy 2 of Federal Form W-2.

(2) On or before January 31 of each year, the employer or payor shall file with the Comptroller the following forms, returns, and information:

(a) MW 508 - Employer's Annual Withholding Reconciliation Report.

(b) If the employer is not required under §E(2)(c) of this regulation to provide W-2 information on magnetic media, then the employer shall file Copy 1 of Federal Form W-2 for each employee.

(c) An employer is required to provide W-2 information on magnetic media, or other machine-readable or electronic format approved by the Comptroller, if the total number of W-2 statements equals or exceeds:

(i) 25; or

(ii) The federal threshold for filing on magnetic media, if the federal threshold is lower than 25.

(d) If the employer is required to provide W-2 information using magnetic media, then the employer shall file with the Comptroller the withholding and tax information on magnetic tape, or if approved by the Comptroller, other magnetic media permitted under IRS regulations as follows:

(i) Magnetic tape or other approved magnetic media used in reporting withholding and tax information shall conform to the Social Security Administration reporting requirements for the filing of W-2 information as specified in regulations of the Internal Revenue Service as amended from time to time and shall contain Maryland income tax and withholding data;

(ii) Employers using magnetic tape or other approved magnetic media may submit to the Comptroller a copy of the data submitted to the Social Security Administration if Maryland information is included or may submit magnetic media containing only income tax and withholding data of employees subject to the Maryland Income Tax Law.

(e) Waiver of Magnetic Media Filing Requirement.

(i) An employer or payor may annually apply, in writing, at least 45 days before the due date, to the Comptroller for a waiver from the requirement under §E(2)(c) of this regulation.

(ii) The Comptroller may grant a waiver if the employer or payor can show that the Internal Revenue Service has granted the employer or payor a waiver from filing information returns electronically by submitting a copy of the federal waiver to the Comptroller, or that the requirement would cause the employer or payor undue hardship. The principal factor in determining undue hardship will be the amount, if any, by which the cost of filing on magnetic media in accordance with §E(2)(d) of this regulation exceeds the cost of filing the returns on other media.

(f) Any 1099 series Federal Form, if the employer or payor is required under federal law to file the form and Maryland State withholding tax is greater than $10.

F. Withholding Agent's Liability.

(1) Any employer who negligently shall fail either to withhold the required tax or to pay it to the Comptroller as specified, or both, shall be held personally and individually liable for all monies so involved, and if the employer is a corporate entity, the personal liability shall extend and be applicable to any:

(a) Officer of the corporation who exercises direct control over the fiscal management of the corporation; and

(b) Agent of the corporation who, in the agent's capacity as such, is under a duty to withhold the tax and transmit it to the Comptroller.

(2) The tax withheld under this regulation shall be deemed to be held by the employer in trust for the State and shall be duly recorded by an employer in a ledger account so as to clearly indicate the amount of tax withheld and that this amount is the property of the State. Failure to transmit to the Comptroller any tax withheld shall constitute a lien in favor of the State recoverable in the manner provided under Tax-General Article, Title 13, Subtitle 8, Annotated Code of Maryland. The failure on the part of an employer to furnish an individual resident or nonresident from whom tax has been withheld a statement of it setting forth the information prescribed on the Federal Form W-2, or where the required statement so furnished is deemed a fraudulent statement, then the employer shall for each failure be subject to a civil penalty in the amount of $50.

(3) The failure of a person, as defined in Tax-General Article, § 1-101(p), Annotated Code of Maryland, to furnish an annual withholding reconciliation report as required under Tax-General Article, § 10-911, Annotated Code of Maryland, or where the required report so furnished is deemed a fraudulent statement, then the employer or payor shall, for each violation, be subject to a civil penalty in the amount of $100.

G. Other Payments Subject to Withholding.

(1) A payor shall withhold the amount of income tax from an annuity, sick pay, or retirement distribution as defined in Tax-General Article, §10-905(a-1), Annotated Code of Maryland, that the payee requests. The payee shall file Form MW 507P with the payor to elect to withhold the payments. The payor is also subject to the annual reconciliation report requirement and shall file this return, Form MW 508, with the Comptroller.

(2) Eligible Rollover Distribution.

(a) If a payment to a payee is a designated distribution that is an "eligible rollover distribution" within the meaning of § 3405(c) of the Internal Revenue Code, which includes any part that is not rolled over directly to another qualified plan and which is subject to federal mandatory withholding, then it is subject to State withholding.

(b) The withholding rate as applied to the payment is 7.75 percent.

(c) The payor shall withhold tax on each eligible rollover distribution and remit the tax to the Comptroller with a withholding return, Form MW 506. The payor shall file an annual reconciliation report, Form MW 508, with the Comptroller as set forth in §D of this regulation.

Md. Code Regs. 03.04.01.01

Regulation .01 effective August 4, 1970; amended effective April 7, 1978 (5:7 Md. R. 520)
Regulation .01A amended effective November 30, 1979 (6:24 Md. R. 1918); October 3, 1980 (7:20 Md. R. 1876); January 9, 1989 (15:27 Md. R. 3126); October 12, 1992 (19:20 Md. R. 1813); December 28, 1998 (25:26 Md. R. 1918); December 22, 2003 (30:25 Md. R. 1844); October 9, 2006 (33:20 Md. R. 1612); February 9, 2009 (36:3 Md. R. 207);40:13 Md. R. 1073, eff. 7/8/2013
Regulation .01B amended effective November 30, 1979 (6:24 Md. R. 1918); October 3, 1980 (7:20 Md. R. 1876); September 12, 1983 (10:18 Md. R. 1606); October 3, 1988 (15:20 Md. R. 2333); January 9, 1989 (15:27 Md. R. 3126); June 26, 1989 (16:12 Md. R. 1332); August 20, 1990 (17:16 Md. R. 1989); October 12, 1992 (19:20 Md. R. 1813); January 14, 1999 (26:1 Md. R. 21); December 22, 2003 (30:25 Md. R. 1844); October 9, 2006 (33:20 Md. R. 1612);40:13 Md. R. 1073, eff. 7/8/2013
Regulation .01B, C amended effective March 21, 2011 (38:6 Md. R. 393)
Regulation .01B, E amended effective April 30, 2012 (39:8 Md. R. 533)
Regulation .01C amended effective October 3, 1980 (7:20 Md. R. 1876); January 9, 1989 (15:27 Md. R. 3126); October 12, 1992 (19:20 Md. R. 1813);41:6 Md. R. 377, eff. 3/31/2014
Regulation .01D amended effective November 30, 1979 (6:24 Md. R. 1918); May 6, 1985 (12:9 Md. R. 808); December 1, 1986 (13:24 Md. R. 2557); October 3, 1988 (15:20 Md. R. 2333); October 12, 1992 (19:20 Md. R. 1813); January 14, 1999 (26:1 Md. R. 21); December 22, 2003 (30:25 Md. R. 1844); October 9, 2006 (33:20 Md. R. 1612); October 22, 2007 (34:21 Md. R. 1913)
Regulation .01E amended effective November 30, 1979 (6:24 Md. R. 1918); October 3, 1988 (7:20 Md. R. 1876); May 6, 1985 (12:9 Md. R. 808); August 20, 1990 (17:16 Md. R. 1989); October 12, 1992 (19:20 Md. R. 1813); December 22, 2003 (30:25 Md. R. 1844); October 9, 2006 (33:20 Md. R. 1612)
Regulation .01F amended effective October 3, 1988 (15:20 Md. R. 2333); January 9, 1989 (15:27 Md. R. 3126); December 22, 2003 (30:25 Md. R. 1844)
Regulation .01G adopted effective October 9, 2006 (33:20 Md. R. 1612)
Regulation .01G amended effective February 9, 2009 (36:3 Md. R. 207); amended effective 44:6 Md. R. 324, eff. 3/27/2017; amended effective 49:9 Md. R. 529, eff. 5/2/2022