If your small business has employees working in Montana, you’ll need to withhold and pay Montana income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Montana state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Montana) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Montana withholding tax account with the Montana Department of Revenue (DOR). You set up your account by registering your business with the DOR online, by mail, or by fax. You can register online using the DOR’s Taxpayer Access Point (TAP). To register on paper, use Form GenReg,Registration/Application for Permit, which you can download from the forms section of the DOR website. You can submit Form GenReg by mail or by fax (fax number is on the form). There is no fee to register your business with DOR.
All new employees for your business must complete both a federal Form W-4. Unlike many other states, Montana does not have a separate state equivalent to Form W-4, but instead relies on the federal form. You can download blank Forms W-4 from the IRS. A few parts of the federal W-4 do not apply for the state (for example, Montana does not recognize an exempt status). Clearly label W-4s used for state tax withholding as your state withholding form. You should keep the completed forms on file at your business and update them as necessary.
In Montana, there are three primary payment schedules for withholding taxes: accelerated, monthly, or annually. In rare situations, an employer may have a so-called “not required” payment scheduled (not covered here). Your payment schedule ultimately will depend on the average amount you hold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments. Newly registered employers will follow a monthly payment schedule. For established/existing employers, the DOR will complete a look-back review to determine the reporting and payment schedule for the next calendar year.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time so you should check with the DOR at least once a year for the latest information.
Here are the due dates for various payment schedules:
If the payment is due on a weekend or holiday, the due date is the next business day. If no wages were paid during a payment period, you are required to submit a zero dollar payment through an ePayment option or by mailing a payment voucher marked $0.00.
You can file your payments by mail or online. To file by mail, use Form MW-1, Montana Withholding Tax Payment Voucher. You can download blank vouchers from the forms section of the DOR website. You can make payments online either through the DOR’s Taxpayer Access Point or through an ACH credit (see the DOR website for more details including how to register for ACH credit services).
The DOR provides several different methods for calculating how much tax to withhold. For more information, check the DOR’s Employer’s Tax Guide, which you can download from the forms section of the DOR website. The guide is updated each year.
Many other states require employers to file a separate state withholding tax return, analogous to the federal Form 941, each quarter. Montana, however, currently has no such requirement.
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 summarizing the employee’s withholding for the year. Use Form MW-3, Montana Annual Wage Withholding Tax Reconciliation. You should attach copies of the federal W-2s sent to all of your employees working in Montana. You can file the reconciliation and W-2s by mail or online. To file the reconciliation online, use the DOR’s Taxpayer Access Point (TAP). To file W-2s electronically, use TAP or check the DOR website for additional options.
The annual reconciliation is due on or before the last day of February. As with tax payments, if the reconciliation is due on a weekend or holiday, the due date is extended to the next business day.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Montana employee withholding taxes. Under Montana law, employers are responsible for pay amounts withheld when those amounts are due. Otherwise, the owners of the business become personally liable for the tax due even if the business is a corporation. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.