Frequently Asked Questions about Withholding Tax
Withholding is money deducted and taken from an employee's wages by an employer for payment of the employee's income taxes.
As an employer, what are my responsibilities?
Individuals who earn wages by performing services in Montana are liable for Montana income tax. As an employer, it is your duty by law to deduct the tax from the wages you pay. Every employer who resides in Montana and every non-resident employer who pays wages for services performed in Montana must withhold Montana income tax. This money belongs to the employee and is only held, in trust, by the employer until paid to the state. Withholding should not be used by the employer to operate the employer's business.
How much do I withhold?
The amount of tax you withhold from an employee's pay depends on three factors: (1) length of your payroll period, (2) gross pay, and (3) number of withholding allowances claimed on W-4 forms. To request a copy, please call (406)444-6900.
NOTE: An employee may request additional monies be withheld to meet his/her tax obligation. The amount withheld would be reported and paid as any other withholding.
What is exempt from withholding?
There are certain kinds of services and compensation specifically excluded by law for withholding purposes. Refer to the State Employment Tax Chart in the downloadable forms section of the website for a list of exemptions.
If you pay wages to persons who qualify under the following exemptions, do you have to withhold on their wages?
North Dakota Residents - Montana and North Dakota have a reciprocal agreement which calls for a resident of one of the states to pay income tax to his state of residency even though the compensation upon which the tax is based is earned in the other state.
An employer is not required to withhold Montana income tax from compensation paid to an employee who has established himself/herself as a North Dakota resident.
An employee who wishes to take advantage of this treatment must obtain Form NR-2 (Employee's Certificate of North Dakota Residence) by writing the Department of Revenue, P.O. Box 5835, Helena, Montana 59604-5835 or calling (406) 444-6900. The employee must complete the form and file it with the employer, who then must send a copy of the completed NR-2 to the Montana Department of Revenue.
The department may require the employer to disregard an employee's false or unsubstantiated NR-2 and may require resumption of withholding and/or collection of uncollected withholdings from the employee's current wages.
Interstate Transportation - Employees of motor and rail carriers subject to the jurisdiction of the Interstate Commerce Commission, are subject to Income Tax Withholding only in their state of residency. Montana resident transportation workers pay income tax to Montana on all their earnings.
Native Americans - Compensation paid by an employer to enrolled members of an Indian tribe who live and work within the boundaries of their enrolled tribe's reservation is not subject to Montana income tax withholding.
Compensation paid by an employer to enrolled members of an Indian tribe who do not live and work within the boundaries of their enrolled tribe's reservation is subject to Montana income tax withholding. All employers must withhold Montana income tax in this instance.
What about pensions, annuities, deferred compensation and IRA's? Are they subject to withholding?
Employee contributions to qualifying annuity contracts as defined by the Internal Revenue Code (IRC), such as "tax sheltered" annuity plans for teachers, deferred compensation for public employees, or other similar plans, are exempt from withholding requirements to the extent that the contributions are not included in the employee's adjusted gross income for federal income tax purposes. Contributions made to individual retirement accounts under Sec. 3401(a)(12), IRC, while considered compensation to the employee, are not subject to Montana withholding if the employer reasonably expects that the employee will be able to deduct such amounts as retirement savings account contributions.
Withholding on distributions from pensions, annuities and other deferred-type compensation is voluntary. If an employee requests withholding on these plans, the employer must comply. Call (406) 444-6900 for more information.
What about non-residents/ non-resident aliens?
Compensation paid to a non-resident or non-resident alien is subject to Montana income taxwithholding in all cases unless the compensation is specifically exempted under Montana law.
Short-term or indefinite employment of non-residents in Montana is subject to withholding. Compensation which may be excluded from federal withholding or federal adjusted gross income under a U.S. tax treaty is subject to Montana income tax withholding. The determination of whether or not a non-resident alien qualifies for tax treaty exclusion is not made until the Montana individual income tax return is filed by the non-resident alien at year end.
How is the number of employee withholding allowances determined?
The number of allowances claimed is set by the employee for both federal and state purposes when the Federal W-4 form is completed. (Montana does not provide a separate W-4 form). An employee can have a separate W-4 for state purposes. For state purposes, the following special rules apply:
- Only line 5 of the Federal W-4 is used in determining the number of allowances. Employees may elect to have a different number of allowances for federal and state purposes.
- Exemption from withholding for federal purposes does not exempt an employee from Montana income tax withholding. The State of Montana does not recognize an "exempt" status on a W-4 form.
- If the applicable line on the W-4 is left blank or has anything other than a number entered on it, the employee is deemed to be claiming "zero" withholding allowances.
- Any change to the W-4 form for the Federal Child Tax Credit purposes does not change the W-4 form for state purposes.
- An employer is required to provide a copy of any withholding allowance certificate (W-4) to the Department of Revenue, Helena, Montana, on which an employee has claimed 10 or more withholding allowances. Each certificate is to be provided at the same time and in the same manner as the certificate is required to be provided to the Internal Revenue Service under 26 CFR S37.34021. If the department determines that the certificate is defective, it may require in writing that the employer disregard the allowances claimed. The department will advise the employer of the maximum number of withholding allowances permitted the employee. The filing of a new W-4 form by an employee showing allowances greater than those set by the department must be disregarded.
Each year I give my employees a "Christmas Bonus." How do I withhold?
If supplemental wages such as commissions, bonuses, or overtime pay are paid at the same time as the employee's regular wage, the amount of tax withheld should be based on the total of the regular and supplemental wages. If supplemental wages are paid at a different time (for example, your "Christmas Bonus"), the tax withheld may, at your option, be based on:
- the total of the supplemental wage and the regular wage for the current payroll period; or
- on the total of the supplemental wage and the regular wage for the last preceding payroll period which falls within the same calendar year; or
- a flat 6% of the supplemental wage.
