How Business Structure Affects Your Maryland Taxes

How your business structure affects your Maryland taxes comes down to one split: pass-through entities (sole proprietorships, partnerships, LLCs, and S corporations) push profits onto your personal return at graduated rates from 2% to 6.50%, while C corporations pay a flat 8.25% at the entity level and then shareholders pay again on any dividends. The state rate is only part of the picture. Federal self-employment tax, the qualified business income deduction, and Maryland’s elective pass-through entity tax usually swing the math further than the state rate itself.

Pass-Through Structures: Where the Owner Pays the Tax

If you operate as a sole proprietor or a single-member LLC, Maryland treats the business as a disregarded entity. There is no separate state business return. Profits and losses land on your personal Maryland Form 502 and get taxed at the individual graduated rates, which top out at 6.50% on income over $1,000,000 for 2026.¹ One return, no entity filing, but every dollar of profit is also exposed to federal self-employment tax.

Partnerships, multi-member LLCs, and S corporations file Maryland Form 510, which reports the entity’s total income and shows how it splits among the owners. The business itself generally owes no Maryland income tax on that income. Each owner picks up their share on their personal return and pays at their individual rate.²

There is a wrinkle for pass-throughs with out-of-state owners. The entity has to pay a mandatory nonresident tax of 1.75% on each nonresident individual member’s share of Maryland income, on top of withholding at applicable state rates. For nonresident entity members, such as an out-of-state corporation holding a partnership interest, the rate is 8.25% of that member’s share.³ This keeps the state from losing tax on income that owners might otherwise never report on a Maryland return.

S corporations deserve a note on eligibility. The entity can have no more than 100 shareholders, all U.S. citizens or resident aliens, and only one class of stock (voting and non-voting is fine, but all shares must carry identical rights to distributions and liquidation proceeds). Partnerships, corporations, and nonresident aliens cannot hold shares.⁴ Many businesses with outside investors are locked out of S corp status for this reason.

C Corporations: The Entity Pays, and Then You Pay Again

A C corporation is the only common structure that pays Maryland income tax at the entity level. The state levies a flat 8.25% on the corporation’s Maryland taxable income, reported on Form 500, regardless of how much the company earns.⁵

Then comes the second layer. When the corporation distributes after-tax profits as dividends, shareholders owe personal Maryland income tax on that same money at their individual rate. Federal law softens the sting a bit, because qualified dividends get taxed at 0%, 15%, or 20% instead of ordinary income rates, but the combined state and federal burden across both layers typically exceeds what a pass-through owner pays on the same income. Shareholders with modified adjusted gross income above $250,000 (joint) or $200,000 (single) also owe a 3.8% federal net investment income tax on those dividends.

C corporations still make sense in specific cases. There are no limits on shareholder count, citizenship, or stock classes. The entity can retain earnings at the flat 8.25% Maryland rate instead of pushing them out to owners. For a business that reinvests aggressively and rarely distributes dividends, deferring the shareholder-level tax can outweigh the double taxation problem.

Self-Employment Tax: Often the Biggest Difference

State rates get the attention, but federal self-employment tax is frequently the largest factor in a structure decision. Sole proprietors, single-member LLC owners, and general partners owe 15.3% on net business earnings: 12.4% for Social Security (on earnings up to $184,500 in 2026) and 2.9% for Medicare with no cap.⁶ High earners above $200,000 (single) or $250,000 (joint) pay an additional 0.9% Medicare surtax.

S corporations offer a legal way to shrink that bill, and this is why most small businesses elect S corp status. As a shareholder-employee, you pay yourself a salary subject to payroll taxes. Any remaining profit that flows through as a distribution is not subject to self-employment or payroll tax. On $200,000 of profit with a $90,000 salary, roughly $110,000 escapes the 15.3% hit.

The catch is the IRS reasonable-compensation rule. S corporations must pay shareholders reasonable wages for their services before taking non-wage distributions, and the IRS can reclassify distributions as wages retroactively, triggering back taxes, penalties, and interest.⁷ A $20,000 salary with $180,000 in distributions from a service business is the kind of split that invites a reclassification. Partnerships and sole proprietorships offer no structural mechanism to shelter business income from self-employment tax.

The Qualified Business Income Deduction

Owners of pass-through businesses and sole proprietorships can deduct up to 20% of their qualified business income on their federal return under Section 199A. This does not reduce Maryland taxable income, because the state calculation starts from federal adjusted gross income rather than federal taxable income, but the federal savings are substantial. On $150,000 of qualified business income, the deduction shelters $30,000 from federal tax.

The deduction is fully available to single filers with taxable income below roughly $201,750 and joint filers below $403,500 for 2026. Above those thresholds, the deduction phases down for specified service businesses (law, accounting, health care, consulting) and may be limited by the wages the business pays and the property it holds. C corporation shareholders do not qualify, because dividends are not qualified business income. The deduction is one of the clearest federal reasons the combined math tilts toward pass-through structures for most small businesses.

The Elective PTE Tax and the SALT Cap Workaround

Maryland’s elective pass-through entity tax exists because federal law caps individual state and local tax deductions at $40,000 for tax years 2025 through 2029 ($20,000 for married filing separately). Maryland business owners who pay well above that cap lose the federal deduction on everything over the line.

The workaround: a partnership, multi-member LLC, or S corporation can elect to pay Maryland income tax at the entity level. The IRS confirmed in Notice 2020-75 that such payments are deductible by the entity as a business expense, reducing each member’s share of pass-through income before it reaches the personal return.⁸ Because the deduction happens at the entity level, it sidesteps the individual SALT cap. Members then take a credit on their Maryland personal return for the taxes the entity paid on their behalf, so no one is taxed twice at the state level.

For 2026, the elective rate for individual members equals the sum of the lowest county income tax rate (2.25%) and the highest marginal state rate (6.50%), applied to each member’s share. Entity members are taxed at the 8.25% corporate rate.³ Sole proprietors cannot make this election, because there is no separate entity to pay the tax. That alone is an argument for forming a pass-through entity rather than operating as a sole proprietor once income climbs.

Local Income Tax and SDAT Personal Property Reporting

Every Maryland county and Baltimore City layers a local income tax on top of the state rates. Local rates run from 2.25% to 3.30%, with most counties at 3.20%, Worcester County at 2.25%, Talbot County at 2.40%, and Dorchester and Kent counties at 3.30%.⁹ Anne Arundel, Frederick, and several others use tiered local rates that climb with income.¹⁰ The local tax applies to the same taxable income as the state tax and is collected on your Maryland return.

Pass-through owners pay the local tax on their personal returns. C corporations do not pay local income tax at the entity level; it hits when shareholders receive dividends. A Maryland business owner’s combined state-plus-local marginal rate can reach 9.80% on income over $1,000,000, before federal taxes.

Separately, every business registered with the Maryland Department of Assessments and Taxation must file an Annual Report (Form 1) each year by April 15, reporting the value of business personal property such as furniture, fixtures, and equipment. Local jurisdictions use the reported values to assess personal property tax at rates that vary by county. Skipping the report is costly. SDAT can forfeit the entity’s authority to do business in Maryland, and unpaid late-filing penalties referred to the state’s Central Collection Unit pick up another 17%.¹¹

Filing Deadlines by Structure

The forms differ by structure, but calendar-year filers face the same April 15 deadline across the board.

Sole proprietors and single-member LLCs file Maryland Form 502 by April 15 for the prior tax year, in step with the federal Form 1040 deadline.
Partnerships, multi-member LLCs, and S corporations file Form 510 (or Form 511 for the PTE election) by the 15th day of the fourth month after the tax year closes.¹²
C corporations file Form 500 by the 15th day of the fourth month after the tax year ends. An automatic seven-month extension is available by filing Form 500E with full payment of expected tax by the original deadline.¹³
Every registered entity files the SDAT Annual Report (Form 1) by April 15.¹¹

If your business generates income not subject to withholding and your resulting Maryland tax liability reaches $500 or more, you should make quarterly estimated payments on April 15, June 15, September 15, and January 15 of the following year. To avoid interest, total estimated payments must cover at least 90% of the current-year liability or 110% of the prior year’s, whichever is smaller, with each installment covering at least 25% of the required total.¹⁴ Federal estimated tax follows the same calendar when you expect to owe $1,000 or more for the year after credits and withholding.¹⁵

1
Comptroller of Maryland. Withholding Tax Facts January 2026
2
Maryland General Assembly. Maryland Code Tax-General 10-102.1 – Pass-Through Entity Income Tax
3
Comptroller of Maryland. Changes to Tax Year 2026 Pass-Through Entity Estimated Payments
4
Internal Revenue Service. About Form 8832, Entity Classification Election
5
Maryland General Assembly. Fiscal and Policy Note for House Bill 690
6
Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
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Internal Revenue Service. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes
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Comptroller of Maryland. 2026 Maryland State and Local Income Tax Withholding Information
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Comptroller of Maryland. Maryland Income Tax Rates and Brackets
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Maryland Department of Assessments and Taxation. Frequently Asked Forfeiture Questions
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Comptroller of Maryland. Form 510 Pass-Through Entity Income Tax Return Instructions
13
Library of Maryland Regulations. COMAR 03.04.03.04 – Filing of Returns
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Comptroller of Maryland. Personal Tax Tip 54 – Should You Pay Estimated Tax to Maryland?
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Internal Revenue Service. Estimated Tax for Individuals