W-2 or 1099? A Simple Guide for Montana Small Businesses

No tax jargon. Just clear guidance for busy business owners.

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Worker Classification Doesn’t Have to Be a Headache

If you’re a small business owner in Montana—whether you’re farming, running a salon, or building websites—you’ve got enough on your plate. Knowing whether someone should be classified as a W-2 employee or a 1099 contractor is key to staying out of trouble with the IRS and the Montana Department of Labor.

This guide keeps it simple, practical, and local.

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Start With These 3 Quick Questions

Before you sign a contract or cut a check, ask yourself:

1. Am I hiring them as part of my team or just for a one-time job?

2. Do I control how and when they work?

3. Am I providing tools, supplies, or a workspace?

If the answer is “yes” to most of these, you might need to treat them like an employee.

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W-2 Employee: What That Looks Like

If you’re calling the shots—you tell them when to work, how to do it, and provide the gear—they’re likely a W-2 employee.

Typical W-2 Situations:

• You set their schedule

• They use your equipment

• You withhold taxes

• You might offer benefits like PTO or insurance

Action Step: You’ll need to run payroll and issue a W-2 at year-end. Ask your payroll provider or tax pro to set this up.

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1099 Contractor: What That Looks Like

Contractors are in business for themselves. They decide how and when they work, provide their own tools, and are responsible for their own taxes.

Typical 1099 Situations:

• They work independently

• Use their own tools or software

• Invoice you per project—not hourly

• You don’t deduct taxes

• You issue a 1099-NEC if you pay them $600+ in a year

Action Step: If this sounds right, use a written contract and keep clear records.

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Montana Rule: ICEC = Workers’ Comp Exemption Only

Here’s the key point for Montana businesses:

Even if someone is correctly classified as a 1099 contractor for tax purposes, you still need to address workers’ comp.

To be excluded from your workers’ compensation policy, they must have a valid Independent Contractor Exemption Certificate (ICEC) from the Montana Department of Labor & Industry.

If They Don’t Have an ICEC:

• You’re required to include them in your workers’ comp coverage

• It does NOT change their 1099 status for tax purposes

• But it does expose you to liability if they get hurt and you’re not covered

Options If They Don’t Have ICEC:

• Add them to your existing work comp policy

• Ask them to apply for an ICEC before starting

• If it’s a longer or riskier job, consider getting a policy in place

Action Step: Ask to see a copy of their ICEC. If they don’t have one, visit erd.dli.mt.gov to apply.

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Real-World Examples

Farm Example:

You hire someone for wheat harvest. They follow your schedule, use your combine, and work under your supervision.

That’s a W-2 employee.

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Salon Example:

You bring in a stylist during wedding season. She uses your

tools, booking system, and sees your clients.

That’s a W-2 employee.

But if she rents a chair, brings her own color line, and books her own clients?

1099 contractor—with ICEC required for workers’ comp.

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Freelance Example:

You hire a graphic designer to redo your website. He works from his own office, sets his hours, and has other clients.

That’s a 1099 contractor (just make sure he has the ICEC).

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Quick IRS Test: W-2 or 1099?

Test Area W-2 Employee 1099 Contractor

Behavioral Control You control how they work They decide how to do the work

Financial Control You provide tools/supplies They invest in their own tools

Relationship Type Ongoing work, maybe benefits Project-based, no benefits

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Still Not Sure?

Don’t guess.

• You can submit IRS Form SS-8 to request a ruling

• Or just ask your Montana accountant—we deal with this stuff all the time

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Summary: W-2 vs 1099 Quick Checklist

Feature	W-2 Employee	1099 Contractor
You set schedule	Yes	No
Uses your equipment or supplies	Yes	No
Pays their own taxes	No	Yes
You must issue tax forms	W-2	1099-NEC
ICEC required in Montana	No	Yes
Must be in your work comp policy if no ICEC	N/A	Yes

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Need Help Classifying Someone?

We work with farms, contractors, stylists, freelancers, and family businesses across Montana. If you’re not sure whether someone should be W-2 or 1099—or whether you need to cover them for workers’ comp—we’re here to help.

Let’s make your next move a confident one.

Call or text us today.