Operational Gaze:
How to Run Payroll in Montana?

April 7th 2024

Managing payroll as an employer in Montana entails following various legal procedures when paying employees. Payroll procedures include calculating earnings, deductions, and complying with payroll tax regulations. To efficiently oversee payroll, employees must have a clear understanding of payroll regulations and stay informed about Montana’s unique labor laws and tax rules.

This article offers a step-by-step guide tailored to meet Montana’s specific payroll requirements. Its purpose is to simplify the payroll process by offering advice and instructions for Montana businesses, ensuring that payroll activities are conducted in compliance with the law.

This Article Covers

Laws That Affect Payroll Procedures in Montana
Worker Classifications in Montana
Payroll Forms and Relevant Bodies in Montana
Applicable Taxes in Montana
Key Pay Elements That Impact Payroll in Montana
Step-by-Step Guide to Payroll in Montana

Laws That Affect Payroll Procedures in Montana

There are specific employment laws that impact various aspects of the workplace. These laws include wage regulations, labor conditions, and employee leave policies. 

Montana Laws

Montana labor laws include regulations that affect different aspects of the workforce, like labor regulations, minimum wage standards, and family leave policies. Here’s an overview of some of the main laws and regulations in Montana:

  • Montana Administrative Code: The Labor and Industry section in the Montana Administrative Code deals with wage payments, sick leave, and workers’ compensation. It’s important to note that Montana’s laws also follow federal laws like the Fair Labor Standards Act (FLSA) for certain rules.
  • Minimum Wage: Montana is gradually increasing the minimum wage, currently set at $10.30 per hour.
  • Overtime Pay: Montana follows federal guidelines for overtime pay. Non-exempt employees must receive overtime pay at 1.5 times their regular wage for hours worked beyond 40 in a workweek.
  • Paid Family and Medical Leave (PFML): Employers in Montana are required to make provisions for paid family and medical leave, offering eligible employees paid leave for specific family and medical situations. Employers are required to contribute to this program.
  • Equal Pay Act: Montana enforces an Equal Pay Act, which prohibits wage discrimination based on gender. Employers must ensure that all employees, regardless of gender, receive equal pay for similar work.
  • Meal and Rest Breaks: Employers in Montana are not required by laws to provide meal breaks. Employers have the freedom to decide whether to offer rest and meal breaks to their employees.
  • Parental Leave: Montana’s Parental Leave Act provides eligible employees with job-protected, unpaid leave for reasons such as childbirth or adoption.
  • Sick Leave: Montana has laws that govern sick leave, requiring employers to provide paid or unpaid sick leave to eligible employees. These laws also specify how sick leave accrues and can be used.
  • Wage Theft Prevention: Montana has regulations to prevent wage theft, covering rules related to wage payment, including provisions on deductions and the timing of wage payments.

Federal Laws

  • The Federal Unemployment Tax Act (FUTA): Employers are obligated to make contributions towards unemployment taxes, which are used to provide benefits to eligible employees who lose their jobs. While it doesn’t directly impact employees’ paychecks, as it’s a responsibility of the employer, FUTA contributions still need to be documented in every payroll cycle. Typically, there’s an expected 6% tax on the first $7,000 paid to an employee annually, with potential exceptions depending on the industry.
  • The Fair Labor Standards Act (FLSA): FLSA establishes guidelines and parameters for minimum wage, overtime pay, record-keeping, exemption classification, and rules concerning child labor in various industries. These regulations apply not only to private businesses but also extend to federal, state, and local government entities.
  • The Federal Insurance Contributions Act (FICA): FICA requires both employers and employees to make contributions to Social Security and Medicare. Employers must withhold 6.2% for Social Security tax and 1.45% for Medicare tax from each employee’s earnings. Employers are also required to match these deductions, resulting in a total FICA payroll tax rate of 15.3% for each employee.

HR Laws

  • New Hire Reporting in Montana: Employers in Montana are legally required to report new hires within 20 days of hiring. The notification should contain detailed information about each newly hired, recalled, or rehired individual.
  • Posting Requirements in Montana: All businesses operating in Montana that employ workers must comply with specific posting requirements. Employers must display labor law posters within the workplace. These posters address a range of vital topics, including minimum wage regulations, health and safety guidelines, and other significant labor laws, ensuring that employees are informed about their rights and responsibilities under Montana labor laws.

Worker Classifications in Montana

Employees and Independent Contractors

It’s essential for employers and employees in Montana to understand and have knowledge on employee classification. This classification has a significant impact on how payroll is handled and on the benefits and legal protections provided to workers.

When someone is considered an employee, their earnings are subject to state unemployment taxes, which might make them eligible for unemployment benefits. On the flip side, if they’re labeled as an independent contractor, the employer doesn’t have to pay state unemployment taxes on their income, and their work isn’t covered under certain employment laws.

Additionally, independent contractors don’t have the same legal rights as employees, including:

  • Following minimum wage rules.
  • Qualifying for overtime pay.
  • Accessing workers’ compensation benefits.
  • Family and Medical Leave.

For more details on the rights of salaried and hourly employees, you can check out our guides on the rights of salaried employees in Montana and the rights of hourly employees in Montana.

The AB Test

In Montana, the classification of employees follows the AB Test, a method used to determine whether a worker should be considered an independent contractor or an employee.

According to Montana’s employment laws, an Independent Contractor is defined under the Common Law as follows:

  • “A” stipulates that the worker must operate independently, free from control and direction regarding their tasks and responsibilities.
  • “B” requires the worker to maintain their own independently established trade, business, occupation, or profession, as listed on their Independent Contractor Exemption Certificate (ICEC).

This AB Test framework in Montana serves as the guiding principle for distinguishing between independent contractors and employees, ensuring that the appropriate employment classification is applied in accordance with state regulations.

Payroll Forms and Relevant Bodies in Montana

Montana Payroll Forms

  • Form MW-4: Employees fill out this form to state how much state income tax should be taken from their paychecks.
  • Form MW-3: Employers complete this form each year to show how much state income tax they withheld from employees.
  • Form MW-1: This form is used to report state income tax withholding and wages every quarter.

Federal Payroll Forms

  • W-4 Form: This form helps employers in determining the correct amount of tax to withhold from their employees’ paychecks.
  • W-2 Form: Presents an overview of each employee’s total annual earnings.
  • W-3 Form: Provides a summary of the combined compensation and tax information for all employees.
  • Form 940: This form is used to report unemployment taxes owed to the IRS.
  • Form 941: This form is used on a quarterly basis to report the money and FICA tax taken from employees’ paychecks.
  • Form 944: This form reports the money and FICA taxes collected from employees’ paychecks in a year.
  • 1099 Forms: These papers give independent contractors the information they need to figure out how much tax they owe to the IRS based on their earnings.

Federal and Montana Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS is the main national agency in charge of collecting federal income taxes, including payroll taxes. Employers report and send federal taxes to the IRS.
  • Social Security Administration (SSA): SSA supervises the collection and administration of Social Security and Medicare taxes, which are part of FICA (Federal Insurance Contributions Act) taxes.
  • U.S. Department of Labor (DOL): DOL enforces national labor laws and sets regulations related to wages, overtime, and labor practices.
  • U.S. Citizenship and Immigration Services (USCIS): USCIS manages employment-related immigration matters, such as confirming the work eligibility of employees through Form I-9.
  • Department of the Treasury: The Department of the Treasury oversees various financial and economic matters, including the collection of federal taxes.
  • Montana Department of Revenue: The Montana Department of Revenue is responsible for collecting various taxes in Montana, including income tax and sales tax. Employers in Montana report and send state income taxes to this department.
  • Montana Department of Labor and Industry: The Montana Department of Labor and Industry enforces state labor laws and regulations, including those related to minimum wage, overtime, and workplace safety.
  • Montana Department of Justice: The Montana Department of Justice oversees the state’s legal matters, including issues related to employment law and workers’ rights.

Applicable Taxes in Montana

Employer Contributions

  • Unemployment Taxes in Montana: Montana follows the Federal Unemployment Tax Act (FUTA), which sets a standard federal rate of 6% on the first $7,000 of each employee’s earnings. Employers in Montana must collect and send FUTA taxes to the federal government to support unemployment benefits.

Withheld from Employee’s Wages

  • State Income Taxes: Montana enforces a state income tax, applicable to both individuals and businesses. The state uses a progressive income tax system with various tax rates, ranging from 1% to 5.90%. All income earned by individuals and businesses is subject to Montana’s state income tax. It’s worth noting that Montana does not impose a state-level sales tax. However, local areas can impose sales taxes, up to a maximum of 2%.
  • Workers’ Compensation in Montana: Montana law requires employers to provide workers’ compensation coverage to their employees. This ensures that employees who experience work-related injuries or illnesses receive compensation for their medical expenses and disability benefits. In the unfortunate event of a work-related death, workers’ compensation benefits extend to the dependents of the deceased employee.
  • Social Security (FICA) Withholding: Employers in Montana must follow the Federal Insurance Contributions Act (FICA). This federal law mandates deducting taxes for Social Security and Medicare from employees’ paychecks. Employers also need to match these deductions by contributing an equivalent amount for Social Security and Medicare. It’s important to note that for the additional Medicare tax, employers only need to withhold the employee’s portion and are not required to match it themselves.

Additional Relevant Subtractions to Withhold on Behalf of Employees

In Montana, employers adhere to the regulations outlined in the Fair Labor Standards Act (FLSA), which dictate the rules surrounding deductions from employees’ paychecks. These deductions can only occur in situations explicitly allowed by the law or with the clear consent of the employees. There are specific instances in which deductions are legally permissible.

Firstly, employers can deduct pay for disciplinary suspensions lasting one or more full days, as long as they are administered in good faith and as a consequence of workplace rule violations. Additionally, employers have the authority to deduct amounts to cover jury fees, witness fees, or payments for temporary military duty received by their employees. Deductions for personal absence, except for cases related to illness or disability, are also allowed when employees are absent for one or more full days.

Furthermore, in cases of sickness or disability, deductions can be made, provided there is a legitimate plan or policy in place to compensate for the loss of pay due to illness. Employers are well within their rights to make deductions for unpaid leave taken under the Federal Family and Medical Leave Act, which offers job-protected leave for specific family and medical reasons. Lastly, employers may impose penalties in good faith for significant safety regulation violations, and these penalties may be recovered from employees’ wages.

Key Pay Elements That Impact Payroll in Montana

Minimum Wage

The minimum wage in Montana is $10.30 per hour. Employers cannot count tips toward meeting the minimum hourly wage.

Overtime

Montana follows federal Fair Labor Standards Act (FLSA) rules for overtime. If an employee works more than 40 hours in a workweek, they must be paid 1.5 times their regular hourly wage. With Montana’s $10.30 minimum wage, this means an overtime rate of $15.45 per hour.

Workers’ Compensation Insurance

In Montana, employers must provide workers’ compensation coverage for their employees if they have one or more workers, unless they are approved as self-insurers by the Montana Workers’ Compensation Court. Like Alaska, there are exceptions for certain part-time, seasonal, or specialized workers.

Pay Stub Laws

Montana employers must provide employees with a pay statement for each pay period. This statement should show the hours worked, earnings, deductions, hourly wage, total earnings, tax deductions, and authorized deductions. It should also include the pay period’s start and end dates.

Wage Garnishment

Wage garnishment laws in Montana follow both federal and state rules. The Consumer Credit Protection Act (CCPA) sets a maximum limit on the percentage of income that can be garnished, usually up to 25% of disposable income. Different types of debts, like child support, alimony, student loans, and unpaid taxes, can be subject to wage garnishment. For debts like credit card or medical bills, a court judgment is typically needed before wages can be garnished.

In Montana, state laws align with federal guidelines for wage garnishment and protect employees. It’s illegal to fire an employee just because of wage garnishment, except in cases of multiple garnishments. Creditors must notify debtors before starting wage garnishment, and debtors can dispute the debt or request a hearing. Montana’s state laws specify the order in which different debts are handled and outline the wage garnishment process.

Final Paycheck

When an employee is terminated or let go, their wages must be provided immediately, either within four hours or by the end of the business day, whichever comes first. However, if the employer has an established written policy that allows for an extended payment period, or if they have quit their job, the wages cannot be delayed beyond the payday following the separation or a maximum of 15 calendar days, whichever comes first.

Step-by-Step Guide to Payroll in Montana

Managing payroll in Montana involves several key steps. Follow this straightforward breakdown to get started:

  • Understand Payroll Rules for Your Business: It’s essential to know and follow the payroll rules that apply to your company in Montana before beginning the payroll process. These rules come from state and federal authorities. In Montana, you should consider things like minimum wages, overtime rules, tax deductions, and other factors that affect payroll.
  • Register Your Business as an Employer with the IRS: This involves getting your Employer Identification Number (EIN) and setting up an account in the Electronic Federal Tax Payment System (EFTPS). For new businesses, obtaining an EIN is crucial before creating a customized payroll process chart. The EIN serves as a unique ID used by the Internal Revenue Service (IRS) to track your tax-related activities. You can easily apply for an EIN online using Form SS-4.
  • Register with the State of Montana: If your business operates in Montana, you need to register it with the state. New businesses can complete the necessary paperwork for business licenses with the Montana Department of Revenue and legal entity registration with the Montana Secretary of State.
  • Employee Classification: Incorrectly categorizing an employee as an independent contractor and mishandling their tax responsibilities can lead to the employer being responsible for unpaid taxes and penalties. In Montana, the state uses specific criteria to determine an individual’s status as an independent contractor.
  • Gather Payroll Paperwork from Employees: Newly hired employees must provide certain documents, including payroll forms, during their onboarding process. All employees must complete I-9 verification within their first days of employment. Additionally, every employee should maintain a completed W-4 form in their records.
  • Establish a Payroll Schedule: Decide on how often you’ll pay your employees. Montana’s payroll regulations require employees to receive regular payments, whether it’s semi-monthly, bi-weekly, or weekly, as agreed upon with your employees.
  • Monitor Employee Work Hours and Attendance: Accurate payroll management can be ensured by carefully tracking employee time and attendance. Keep records of employee workweeks, calculate overtime, document break times, track paid leave, and monitor sick leave entitlements. To simplify this process, employees can use time and attendance software, a payroll hours tracker, or a time-off tracker.
  • Meet Federal Payroll Tax Obligations in Montana: Follow IRS rules for federal taxes, including unemployment tax. When making federal tax payments, you have two options: If the IRS designates a monthly schedule, deposit employment taxes for payments within a calendar month by the 15th of the following month. If the IRS assigns a semiweekly schedule, deposit employment taxes for payments on Wednesday, Thursday, and Friday by the following Wednesday, and for payments on Saturday, Sunday, Monday, and Tuesday, by the subsequent Friday.
  • Keep Accurate Payroll Records: In Montana, it’s vital to maintain precise records of your employees’ payroll information, including details like their work hours, pay statements, tax forms, and other relevant paperwork. Federal and state laws require Montana employers to keep these records for a specific period, usually at least three years. Maintaining these records securely is essential to comply with audit regulations and have documentation available in case of inquiries or investigations by tax authorities.
  • Complete Yearly Payroll Reports: Each year, you must finalize government reports, such as W-2 Forms and 1099 Forms. Employees should receive these forms no later than January 31 of the following year.

Final Thoughts

Employers in Montana must ensure they adhere to payroll regulations. To simplify the process of managing payroll, consider exploring our list of the top 6 applications tailored to streamline payroll responsibilities in the United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.