9.2 Payroll, Withholding, and Unemployment
Key Takeaways
- Employers withhold federal income tax, Maryland's graduated state income tax (2% to 5.75%), and the employee's county local income tax (roughly 2.25% to 3.2%)
- FICA is 6.2% Social Security (each side) on wages up to $184,500 in 2026, plus 1.45% Medicare each side with no cap, plus a 0.9% employee-only Additional Medicare Tax over $200,000
- FUTA is 6.0% on the first $7,000 per employee, reduced to an effective 0.6% ($42 maximum) by the state unemployment credit; Maryland SUI applies to the first $8,500 at a 2026 new-employer rate of 2.6%
- Maryland requires every employer with one or more employees to carry workers' compensation insurance, with failure-to-insure penalties whose statutory cap was raised to $25,000
- Form 941 is filed quarterly, Form 940 annually, and W-2s and 1099-NECs are due by January 31 — the 1099-NEC reporting threshold rose from $600 to $2,000 for payments made in 2026 or later
Income Tax Withholding
The moment you hire an employee, you become an unpaid tax collector. You must withhold federal income tax based on the employee's Form W-4, and deposit and report it to the IRS. For Maryland, you register with the Comptroller of Maryland and withhold two layers of state tax: Maryland's graduated state income tax, whose rates run from 2 percent up to a top marginal rate of 5.75 percent, plus a county (local) income tax set by the employee's county of residence — roughly 2.25 to 3.20 percent depending on the county. Employees set their Maryland withholding on Form MW507. Employers file periodic withholding returns (Form MW506) on the schedule the Comptroller assigns and reconcile annually with W-2s. If a worker never turns in a W-4, withhold as if the worker were single with no adjustments — never skip withholding entirely.
FICA: Social Security and Medicare
The Federal Insurance Contributions Act (FICA) funds Social Security and Medicare, and the cost is split between employer and employee:
- Social Security: 6.2 percent withheld from the employee plus 6.2 percent paid by the employer, on wages up to the annual wage base — $184,500 for 2026. Wages above the cap are not taxed.
- Medicare: 1.45 percent from each side on all wages; there is no cap.
- Additional Medicare Tax: an extra 0.9 percent on employee wages above $200,000 in a calendar year, withheld from the employee only — there is no employer match.
Worked Example
An employee earns $1,500 in a week (nowhere near any cap):
| Item | Employee withheld | Employer share |
|---|---|---|
| Social Security (6.2%) | $93.00 | $93.00 |
| Medicare (1.45%) | $21.75 | $21.75 |
| Total FICA | $114.75 | $114.75 |
You remit $229.50 in FICA for that paycheck, plus the income tax withheld. Note the asymmetry the exam likes: the employer's 7.65 percent share never appears on the employee's pay stub, which is why employees are cheaper on paper than they are in reality. A genuine independent contractor, by contrast, pays both halves — 15.3 percent self-employment tax — which is one reason misclassification shifts cost onto the worker and draws enforcement.
Unemployment Insurance: FUTA and SUTA
Federal Unemployment Tax Act (FUTA): the employer alone pays 6.0 percent on the first $7,000 of wages per employee per year. Employers who pay their state unemployment contributions on time receive a credit of up to 5.4 percent, producing an effective rate of 0.6 percent — a maximum of $42 per employee per year. FUTA is reported annually on Form 940 and deposited quarterly if the accumulated liability exceeds $500.
Maryland State Unemployment Insurance (SUI): Maryland taxes the first $8,500 of each employee's wages per calendar year. New employers are assigned a standard new-employer rate — 2.6 percent for 2026 — and experienced employers are experience-rated within a range of roughly 0.3 percent to 7.5 percent based on their claims history. Employers file quarterly contribution and wage reports with the Division of Unemployment Insurance. Laying off workers drives your rate up, which is why misclassifying employees as contractors to dodge UI contributions is a core target of the Workplace Fraud Act.
| Tax | Rate | 2026 wage base | Paid by |
|---|---|---|---|
| Social Security | 6.2% each side | $184,500 | employee + employer |
| Medicare | 1.45% each side | none | employee + employer |
| Additional Medicare | 0.9% | wages over $200,000 | employee only |
| FUTA | 0.6% effective | $7,000 | employer only |
| Maryland SUI | 2.6% new employer | $8,500 | employer only |
Workers' Compensation
Under Title 9 of Maryland's Labor and Employment Article, every employer with one or more employees must secure workers' compensation insurance — from a private carrier, from the state-administered fund (Chesapeake Employers' Insurance Company), or through approved self-insurance. Premiums are priced per $100 of payroll by classification code, and construction codes are among the most expensive because the injury risk is high. Operating uninsured triggers a show-cause order from the Workers' Compensation Commission and civil penalties; the General Assembly recently raised the statutory penalty cap for failure to insure from $10,000 to $25,000. MHIC applicants must also certify their workers' compensation compliance — lapses put the license itself at risk.
The Filing Calendar
- Form 941 (federal payroll return): quarterly, due the last day of the month after each quarter. Deposits run monthly or semiweekly depending on your lookback-period liability.
- Form 940 (FUTA): annually.
- Form W-2: to each employee and to the Social Security Administration by January 31.
- Form 1099-NEC: to each independent contractor paid at or above the reporting threshold, also due January 31. The One Big Beautiful Bill Act raised the federal threshold from $600 to $2,000 for payments made after December 31, 2025; note that Maryland has historically enforced its own lower thresholds for some information returns, so confirm state requirements before skipping a filing.
- Keep payroll and wage records at least three to four years.
An MHIC contractor has one employee who earns $60,000 per year, well below the Social Security wage base. Ignoring income tax withholding, how much does the employer pay out of its own pocket for FICA on this employee for the year?
Assuming the employer pays Maryland unemployment contributions on time and earns the full FUTA credit, what is the maximum FUTA tax for one employee in a year?
Which of these payroll obligations is paid entirely by the employer, with nothing withheld from the employee's wages?