Maryland Contractor Taxes and Licensing: A Guide for Trades

Maryland treats real property contractors as the buyers of their materials: you pay the 6% sales tax when you purchase them, and labor to install, erect or repair real property isn't taxable, whether it's itemized or lump-sum. Home improvement work for homeowners requires a Maryland Home Improvement Commission (MHIC) license.

What should contractors know about Maryland first?

Maryland licenses home improvement work tightly and changed several taxes in 2025. The Maryland Department of Labor says "only MHIC licensed contractors may enter into contracts with homeowners to perform home improvement work." That's a real license with an exam, a Guaranty Fund assessment and, since June 1, 2024, at least $500,000 of general liability insurance. Plumbers, electricians and HVACR contractors each answer to their own state board on top of that.

On the tax side, the 2025 Budget Reconciliation and Financing Act added a 3% sales tax on certain data and IT services starting July 1, 2025, and new top income tax brackets. Neither changes how your materials are taxed, but both can change your costs. If you work in Delaware, Virginia or Pennsylvania too, expect different rules at each line.

Do Maryland contractors charge sales tax on labor?

No, not for real property work. The Comptroller's Business Tax Tip #18 says labor charges "(whether separately stated or lump-sum billed) to install, erect, assemble, or repair real property are not taxable." The same goes for separately stated labor to install personal property. But if installation of personal property isn't split out, the whole price is taxable, and fabrication labor is taxable either way.

Which side of the line a job falls on depends on intent. Material meant to "permanently and substantially improve" real property is real property: the Comptroller lists built-in residential dishwashers, garbage disposals, kitchen cabinets, fencing, landscaping, windows and doors. You pay tax on those materials and charge the customer none. Items installed for a temporary purpose, like business cabinetry or modular office furniture, stay personal property: you buy them on a resale certificate and charge tax on the total.

Maryland taxes services only when the law names them. The Comptroller's list of taxable services includes cleaning of a commercial or industrial building and security systems service, which matter if you install alarms or run a janitorial crew. Labor to repair someone's existing tangible personal property isn't taxed. The sales and use tax rate is 6%, with limited exceptions such as the new 3% rate on data and IT services. Compare other states in sales tax on labor vs. materials.

How are materials and out-of-state purchases taxed?

Tax Tip #18 is direct: "Real property contractors must pay the 6 percent sales tax on building materials and supplies." Flooring shows how fine the line is. Vinyl, tile and laminate are real property improvements, so you pay tax to the supplier. Wall-to-wall carpet can be bought tax free on a resale certificate, and then you collect sales tax from your customer. Using a resale certificate (see Business Tax Tip #4) requires a sales and use tax license if you regularly sell tangible personal property.

• Nonprofit jobs: you can use the exemption certificate of a Maryland nonprofit charitable, educational or religious organization, a volunteer fire, ambulance or rescue company, or a nonprofit cemetery for materials incorporated into its real property.
• Government jobs: materials for real property owned by governments, embassies or credit unions are taxable to you. You can't use their exemption certificate.
• Out-of-state purchases: Business Tax Tip #3 says construction materials bought elsewhere and used in Maryland owe the 6% use tax, with credit for tax paid to another state. Licensed businesses report them on line 7 of the sales and use tax return.
• Tools and rented equipment: taxable. Equipment you bring into Maryland gets credit for tax paid elsewhere and a 10% depreciation allowance per full year used outside the state.

One 2025 change to watch: the Comptroller's Tax Alert says the 3% tax applies to data, IT and software publishing services under NAICS codes 518, 519, 5132 and 5415, and the exemption for custom computer software was repealed July 1, 2025. Your software and IT bills may carry it. Read more about use tax for contractors.

What contractor licenses does Maryland require?

MHIC covers alteration, remodeling, repair or replacement of a residence, including roofs, siding, gutters, decks, fences, windows and solar panel systems. It doesn't cover commonly owned areas of condominiums or buildings with four or more single-family units. Subcontractors working for a licensed contractor haven't needed their own MHIC license since July 1, 2016. The Guaranty Fund assessment is $100 on an original license and $175 on renewal, each covering two years; MHIC raised its other fees on August 1, 2024, so check its current fee schedule.

Two local layers still apply. Tax Tip #18 says contractors doing construction need an annual construction license from the local Clerk of the Circuit Court, valid May 1 through April 30, unless they already hold an MHIC license. And the Board of Plumbing says Baltimore County and the Washington Suburban Sanitary Commission area (Prince George's and Montgomery Counties) "issue their own licenses and have their own plumbing code." Permits come from your county or city. See contractor licenses for the national view.

What income taxes do Maryland contractors pay?

Maryland has a graduated income tax plus a county income tax. The Comptroller's December 2025 Tax Alert says that for tax years after 2024 the 5.75% bracket is capped and two brackets were added: 6.25% on Maryland taxable income of $500,001 to $1,000,000 ($600,001 to $1,200,000 for joint filers) and 6.50% above that. It also added a 2% tax on net capital gains for people with federal AGI over $350,000. Counties and Baltimore City may charge up to 3.30% for tax years after 2025.

Tax Tip #18 says resident sole proprietors file Form 502 and make quarterly estimated payments on income not subject to withholding. S corporations, partnerships and LLCs file Form 510 as pass-through entities, and the entity makes estimated payments for nonresident owners. Maryland's pass-through entity (PTE) tax rate is now 8.75% on individual members' shares and 8.25% on entity members' shares. Most entities also file an annual report with the State Department of Assessments and Taxation: SDAT's 2024 Form 1 lists a $300 fee for LLCs and corporations, due April 15. Work out payments with the quarterly estimated tax calculator and quarterly estimated taxes for contractors.

Do you need workers' comp in Maryland?

Yes, once you have an employee. Labor and Employment Article § 9-402 says "each employer shall secure compensation for all covered employees," through an authorized insurer or approved self-insurance. The Workers' Compensation Commission's sole proprietor form reminds owners: if you hire one or more employees, you must insure them. A sole proprietor can choose to cover themself under § 9-227.

Owners of corporations and LLCs are treated differently. Under § 9-206, a paid corporate officer or LLC member is a covered employee by default. Officers of a close corporation, LLC members owning at least 20% of profit interests, and up to five officers of other corporations can elect out with written notice to the Commission and the insurer. Licensing agencies may ask for a Certificate of Compliance from the Commission. More in workers' compensation.