At the end of the year, you must prepare a W-2 for the employee that shows their wages, their federal and state income tax withheld, and their Social Security and Medicare tax withheld. There is no threshold for filing a W-2. You must file the W-2 with the Social Security administration and give the employee a copy, by January 31, if you pay any wages.
The employee must give you a signed form W-4 indicating how they want their federal taxes to be withheld. There may also be a Maryland withholding form, and there is probably a procedure under Maryland law where, if they don't give you a Maryland form, you would use their federal W-4 instead to determine the Maryland withholding.
Depending on the employee's overall income situation for the year, they might owe no federal or Maryland income tax on their income. The employee can choose to select exempt when they file their W-4, and have no federal or state tax withheld. If they turn out to owe tax at the end of the year, they might also owe a penalty, but this mistake would be on them not you.
Withholding of Social Security and Medicare tax is mandatory and you must do this. You will need to file form 941 with the IRS quarterly to report these withholdings. There may also be equivalent state forms that must be filed. If this is your first employee, and you do not currently have a federal EIN, then you need to get one. A schedule C small business owner can use their personal social security number for their business only if they have no employees. Once you begin to hire employees, you must have an EIN. You can get this on the IRS website in about 20 minutes.
