Which States Have Reciprocal Agreements … and What Does That Mean?

Do you have an employee who lives in one state but works in another? If so, you typically withhold state and local taxes for the work state. The employee would still owe taxes to their home state, which could turn into a hassle for them. Or could it? Cue reciprocal agreements.

Reciprocal agreement states have something called tax reciprocity between them, alleviating said hassle. 

What is tax reciprocity?

Tax reciprocity is an agreement between states that lowers the tax burden on employees who commute to work across state lines. In tax reciprocity states, employees do not have to file multiple state tax returns. If there is a reciprocal agreement between the home state and the work state, the employee is exempt from state and local taxes in their employment state. 

Let’s say an employee lives in Pennsylvania but works in Virginia. Pennsylvania and Virginia have a reciprocal agreement. The employee only needs to pay state and local taxes for Pennsylvania, not Virginia. You withhold the taxes for the employee’s home state.

Tax reciprocity only applies to state and local taxes. It has no effect on federal payroll taxes. No matter where you live, the federal government still wants its share.

What about states without reciprocity taxes?

Employees don’t owe twice the taxes in non-reciprocal states. But, employees may have to do a little extra work, such as filing multiple state tax returns. 

Without a reciprocity agreement, employers withhold state income tax for the state where the employee performs work. 

Instead of double withholding and taxation, the employee’s home state may credit them for the amount withheld for their work state. But, keep in mind that an employee’s home and work state might not charge the same state income tax rate. 

If the employee’s work state has a lower state income tax rate than their home state, they owe more to their home state at tax time. If the employee’s work state has a higher state income tax than their home state, they must wait for a refund. 

What is your role in state tax reciprocity?

Employees must request that you withhold taxes for their home state and not their work state. 

Stop withholding taxes for an employee’s work state when your employee gives you their state tax exemption form. Then, begin withholding for the employee’s home state. 

At the end of the year, use Form W-2 to tell the employee how much you withheld for state income tax. 

What if you withhold taxes for the work state?

When an employee who lives in one state and works in another starts working for you, you might automatically begin withholding taxes for the employment state. If you withhold taxes for the work state and not the residency state, the employee has to submit quarterly tax payments to their home state.

When the employee does their individual tax return, they submit a tax return for each state where you withheld taxes. The employee likely receives a tax refund or credit for the taxes paid to the work state.

Reciprocal agreements by state 

Reciprocity between states does not apply everywhere. An employee must live in a state and work in a state that have a tax reciprocity agreement together. 

So, which states are reciprocal states? The following states are those where the

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