State tax reciprocity agreements: 2026 chart, forms and rules

Which state should this paycheck be taxed in, the one where your employee sleeps or the one where they work?

For most of the country the answer is both, at least to begin with. State tax reciprocity is the exception, and it is why someone living in Philadelphia and working in New Jersey pays Pennsylvania and nobody else.

This guide covers what reciprocity is, the four types of agreement, every participating state and its exemption form, what these agreements leave out, and how to fix withholding that has already gone to the wrong state.

What is state tax reciprocity?

State tax reciprocity is an agreement between two states that lets an employee who lives in one and works in the other pay state income tax only to their home state. The work state agrees not to tax or withhold on those wages. In 2026 there are 30 such agreements covering 16 states and the District of Columbia.

The term payroll forms use is reciprocal state, meaning a state that holds one of these agreements with the employee's home state.

Wages can normally be taxed twice over, once where they are earned and once where the worker lives. That overlap is exactly why the difference between payroll tax and income tax causes so much confusion at state level. Reciprocity removes the overlap by assigning the wages to one state only.

It applies to state income tax on W-2 employees. It changes nothing about federal withholding, Social Security, or Medicare, and it does not replace IRS Form W-4.

A quick example. Maria lives in Philadelphia and commutes to Camden, New Jersey. Once she files Form NJ-165 with her employer, New Jersey withholding stops and Pennsylvania withholding starts, and she files one state return.

How does state tax reciprocity work?

Reciprocity switches on in three steps, and the order matters because the employer cannot act until the employee moves first.

1. Confirm the pair: Check that the employee's home state and the state their work is sourced to actually have an agreement. Neighbouring is not the same as reciprocal.
2. File the exemption form: The employee completes the work state's certificate, such as Form WH-47 in Indiana, and hands it to the employer. It sits alongside Form W-4, not in place of it.
3. Switch the withholding: Payroll stops the work state line and starts the home state line from the next run, and the change shows up in the employee's payroll deductions straight away.

Until step two is done, the work state's tax is still legally due. Employers should never flip withholding on the strength of a verbal request or an email.

Some states want the form back every year. Minnesota requires Michigan and North Dakota residents to file Form MWR annually (Minnesota Department of Revenue), and Illinois, Wisconsin and Maryland run similar refresh rules.

If you are setting up multi-state payroll for the first time, our step-by-step walkthrough on how to run payroll covers where this check belongs in the sequence.

What are the types of state tax reciprocity agreements?

Not every agreement works the same way, and the difference decides who has to sign, who grants the relief, and whether the employee feels it in the paycheck or only at filing time.

Bilateral agreements

Two states agree to exempt each other's residents. This is the most common form, accounting for 17 of the 30 agreements in force, with Pennsylvania and New Jersey the textbook pair. Because both sides have to sign, one state cannot create reciprocity alone, and either side can end it.

Unilateral offers

Indiana, Minnesota and Wisconsin extend reciprocity automatically to residents of any state offering comparable treatment, rather than negotiating pair by pair. The employee still files the work state's certificate, so the practical difference is coverage rather than paperwork.

Commuter exemptions

The District of Columbia is the standout case. Instead of naming partner states, it exempts every nonresident who works there and files Form D-4A. It is the only arrangement open to residents of any state, which makes the Washington commuter belt unusually clean to administer.

Reverse credits

Arizona, California, Indiana, Oregon and Virginia use a credit instead of a straight exemption. The home state grants the credit rather than the work state waiving the tax, so relief arrives at filing time instead of in the paycheck. Employees expecting a bigger take-home from day one will not see it.

Which states have tax reciprocity agreements in 2026?

Sixteen states and the District of Columbia take part in 2026. The table below pairs each work state with the home states it recognises and the exemption form the employee files.

In almost every case the form goes to the employer rather than to the state. Once it is filed, the change should appear on the very next pay stub, which is the quickest way for an employee to confirm it actually took effect.

Each state is set out below: which states it has reciprocity with, the form the employee files, and the detail that most often catches employers out.

Arizona reciprocal states and exemption form

Arizona recognises residents of California, Indiana, Oregon and Virginia on Form WEC. It works as a reverse credit rather than a true exemption, so the relief arrives at filing time and withholding does not change.

District of Columbia reciprocal states and exemption form

The District of Columbia lets any nonresident claim exemption on Form D-4A, without naming partner states at all. Maryland and Virginia residents commuting in are the largest group it covers.

Illinois reciprocal states and exemption form

Illinois recognises residents of Iowa, Kentucky, Michigan and Wisconsin on Form IL-W-5-NR. Illinois is one of the states that expects the certificate refreshed rather than filed once and forgotten.

Indiana reciprocal states and exemption form

Indiana recognises residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin on Form WH-47. Indiana county income tax still applies on top, and it is assessed separately from state withholding.

Iowa reciprocal states and exemption form

Iowa has a single agreement, with Illinois, claimed on Form 44-016. An Illinois resident working in Iowa pays Illinois only. Every other Iowa border pair defaults to nonresident filing.

Kentucky reciprocal states and exemption form

Kentucky is the busiest participant with seven agreements, covering residents of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin on Form 42A809. Local occupational taxes are unaffected.

Maryland reciprocal states and exemption form

Maryland recognises residents of the District of Columbia, Pennsylvania, Virginia and West Virginia on Form MW507. Maryland also runs a refresh requirement, so treat the form as annual paperwork.

Michigan reciprocal states and exemption form

Michigan recognises residents of Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin on Form MI-W4. Michigan city income taxes sit outside the agreement and still follow the work location.

Minnesota reciprocal states and exemption form

Minnesota recognises Michigan and North Dakota residents on Form MWR, and it has to be filed every year. The long-running Minnesota and Wisconsin agreement ended in 2010 and has not returned.

Montana reciprocal states and exemption form

Montana has one agreement, with North Dakota, claimed on Form MW-4. A North Dakota resident working in Montana pays North Dakota only, and the pairing runs in both directions.

New Jersey reciprocal states and exemption form

New Jersey recognises Pennsylvania residents only, on Form NJ-165. New Jersey's convenience of the employer rule explicitly does not apply to Pennsylvania residents, because the reciprocal agreement takes precedence.

North Dakota reciprocal states and exemption form

North Dakota recognises Minnesota and Montana residents on Form NDW-R. Both pairings are bilateral, so North Dakota residents get the same treatment working in either of those states.

Ohio reciprocal states and exemption form

Ohio recognises residents of Indiana, Kentucky, Michigan, Pennsylvania and West Virginia on Form IT-4NR. City earnings taxes are not covered, so a Kentucky resident working in Cincinnati still owes the city.

Pennsylvania reciprocal states and exemption form

Pennsylvania recognises residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia on Form REV-419. Philadelphia's wage tax is separate, and Pennsylvania also operates its own convenience rule.

Virginia reciprocal states and exemption form

Virginia recognises residents of the District of Columbia, Kentucky, Maryland, Pennsylvania and West Virginia on Form VA-4. If Virginia tax was withheld in error, the refund runs on Form 763-S.

West Virginia reciprocal states and exemption form

West Virginia recognises residents of Kentucky, Maryland, Ohio, Pennsylvania and Virginia on Form WV/IT-104. Every one of those pairings is bilateral, which makes this one of the simpler borders to run.

Wisconsin reciprocal states and exemption form

Wisconsin recognises residents of Illinois, Indiana, Kentucky and Michigan on Form W-220, and expects it refreshed annually. Its guidance still treats the Minnesota agreement as terminated.

States often assumed to be reciprocal that are not

California and Oregon appear in Arizona's list as home states, but neither offers reciprocity as a work state. A California resident working in another state files a nonresident return there like anyone else.

New York, Connecticut, Delaware and Nebraska have no agreements either, and each runs a convenience of the employer rule that can pull a remote employee's wages back to the employer's state. Oregon applies a narrower version limited to nonresident managerial employees.

The Kansas City metro is the best known gap. Kansas and Missouri have no agreement despite the state line running through the middle of the metro, so commuters file in both states. New York and New Jersey are the same story, which is why New Jersey's convenience rule names New York residents.

Texas is not a reciprocal state and does not need to be, because it levies no income tax at all. The same is true of the other eight states on that list: there is nothing for an agreement to exempt.

Neighbouring is not the same as reciprocal. Check the pair before you change a withholding line.

Which states have no income tax at all?

Nine states do not tax wage income in 2026, which makes reciprocity irrelevant for anyone working in them: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

New Hampshire is the newest name on that list, after its tax on interest and dividend income was repealed with effect from 1 January 2025 (New Hampshire Department of Revenue Administration). Their home state may still expect residence-state withholding.

Who qualifies for state tax reciprocity?

Reciprocity is not automatic even between paired states. Most agreements attach conditions, and an employee who fails one of them owes work-state tax like any other nonresident.

Wage and salary income only: The exemption covers employment income. Anything else sourced to the work state stays taxable there.

A day-count limit: Several states cap how long the employee can be present in the work state. Virginia sets the test at 183 days or less in the year, and Maryland's provision stops applying past the same threshold.

No abode in the work state: Maintaining a house or apartment there generally breaks the exemption, even when the employee's legal residence is elsewhere.

Taxed at home: A nonresident claiming the Virginia exemption has to be taxable on that income in their own state, so the wages cannot go untaxed everywhere.

Conditions are set by the work state rather than by the pair, so read that state's certificate instructions before relying on the chart alone. Virginia also excludes the District of Columbia Unincorporated Business Franchise Tax from its exemption, which is the kind of carve-out that only appears in the fine print.

What state tax reciprocity does not cover

This is where the expensive mistakes happen. A reciprocity agreement is narrower than most people assume, and several obligations sit completely outside it.

Local taxes keep applying

Cities and counties are not parties to these agreements. A Kentucky resident working in Cincinnati owes no Ohio state income tax but still owes Cincinnati's local earnings tax. The same holds for Philadelphia's wage tax and Indiana's county rates.

Unemployment insurance follows the work, not the form

State unemployment tax follows a localisation of work test, not residence and not the exemption form. If an employee's services are localised in the work state, unemployment liability sits there, which usually means registering with that state's workforce agency. That belongs in your employer payroll taxes checklist.

Non-wage income stays with the source state

Reciprocity covers wages and salary. Rent from a property in the work state, business income, or capital gains sourced there stay taxable by that state and can still trigger a nonresident return.

None of this applies to contractors. A 1099 contractor sits outside reciprocity entirely, because there is no employer withholding to exempt in the first place. They handle their own estimated payments and state filings instead, which is covered in our guide to taxes for independent contractors.

Do state tax reciprocity agreements apply to remote workers?

Yes, with one large caveat. If an employee's work is sourced to a state that has an agreement with their home state, reciprocity applies exactly as it would for a commuter, and the exemption form is still required. That is straightforward when a distributed workforce happens to sit in states that already pair up.

The caveat is the convenience of the employer rule. A handful of states source a remote employee's wages to the employer's location when the person works from home for their own convenience rather than business necessity, which can override reciprocity.

Nebraska narrowed its rule in 2024 so it applies only when the nonresident employee is physically in the state for more than seven days in the tax year.

New Jersey's version, retroactive to 1 January 2023, applies to residents of states running a similar test. The state confirms it "does not apply to Pennsylvania residents who work in New Jersey, since there is a Reciprocal Agreement in place" (New Jersey Division of Taxation).

The practical answer for a spread-out team is to map each person's home state and work source state once, then re-check it whenever somebody moves. Companies running remote workforce solutions at any scale tend to build this into onboarding rather than discover it at year end.

Can reciprocity agreements change or be added?

They can, and the best known example is still unresolved. Minnesota and Wisconsin ran a reciprocity agreement for more than forty years until Minnesota ended it with effect from 1 January 2010, citing delayed payments from Wisconsin. It has not been restored.

The wider pattern matters. States signed these agreements steadily for decades before the pace stalled in the early 1990s, and the Tax Foundation counts roughly 5.8 million Americans working outside their state of residence even before remote work expanded. Demand has grown while supply has not.

There has been movement since. 2023 Wisconsin Act 147 required a joint study on reinstating it, delivered in December 2024. Any deal has to be negotiated between the two revenue departments, and Wisconsin still treats reciprocity as terminated (Wisconsin Department of Revenue).

At federal level, versions of the Mobile Workforce State Income Tax Simplification Act have been introduced repeatedly to set a uniform day threshold before a nonresident triggers withholding. None has passed, so this stays a state-by-state exercise.

How is state tax handled when there is no reciprocity agreement?

Most cross-border pairs have no agreement at all, and the default rules take over. Four things happen in sequence.

• The work state withholds first, because almost every state taxes income earned inside its borders regardless of where the earner lives.
• The employee files a nonresident return in the work state and a resident return at home.
• The home state grants a credit for tax paid to the work state, usually capped at what the home state would have charged on the same income.
• The employee effectively pays the higher of the two rates, and the filing work doubles.

That credit is not just good manners. In Comptroller of the Treasury of Maryland v. Wynne (2015) the Supreme Court held that a state scheme failing to credit tax paid to other states was unconstitutional, which is why reciprocity is a convenience improvement rather than a cure for double taxation.

What should you do if the wrong state was withheld?

Wrong-state withholding is fixable, but the fix has two halves: stop the bleeding, then recover what has already gone. Work through these five steps in order.

1. File the exemption form now: It corrects future paychecks, not past ones, and nothing else works until this is done.
2. Claim the refund from the work state: File a nonresident return there. Some states use a dedicated refund form, such as Virginia's Form 763-S (Virginia Tax).
3. Report the income at home: The wages still belong on the resident return even though the wrong state took the money.
4. Cover the shortfall: If the home state received nothing all year, make an estimated payment to avoid an underpayment penalty on top of everything else.
5. Set a reminder: Re-file the exemption form wherever annual certification is required, so the same problem does not repeat next January.

Getting this right the first time is mostly a question of setup. A payroll system that handles multi-state withholding cleanly prevents nearly all of it, which is worth weighing carefully when choosing a payroll provider.

How should employers manage state tax reciprocity?

Reciprocity is usually framed as an employee benefit, but the operational savings land on the employer's desk. One withholding state per employee removes a class of reconciliation work, and single-state withholding backed by a signed form is straightforward to defend in an audit.

• It also widens your hiring radius, because you can recruit across a state line without adding a tax jurisdiction to the monthly close. None of it is automatic, which is what makes payroll automation reliable rather than mostly reliable.
• The benefit only shows up when the exemption forms are collected, dated and stored somewhere you can find them. Four habits separate the teams that never think about reciprocity from the ones that spend every March fixing it.

• Decide the withholding state before the first pay run: Confirm the home state and the work source state during onboarding, not after money has already gone out. Smaller teams often lean on payroll services for small business for exactly this step.
• Collect the exemption form as an onboarding document: Treat it like Form W-4. No form, no exemption. Store it with the rest of the signed paperwork.
• Track expiry dates: Where annual re-certification applies, put it in the calendar so the state does not simply resume withholding.
• Keep the evidence: Auditors ask for the form, the effective date, and payroll records that match it, which is what an EOR compliance audit checklist is built around.

If the administrative load is the real problem rather than the rules, the question shifts to who should run payroll at all. The trade-offs between keeping it in-house and using a co-employer, how co-employment allocates liability, and what it costs to hand the whole function over are each worth reading.

How Wisemonk helps

Wisemonk is an India-native Employer of Record (EOR) and managed payroll partner. We have helped over 300 global companies hire, pay, and manage more than 2,000 employees without setting up a local business entity, and we process over $20 million in monthly payroll.

State reciprocity is a domestic US question that your US payroll handles. The moment your headcount crosses a border, the equivalent questions are completely different: local withholding, statutory contributions, employment law, and who is legally the employer.

That is the part we take on:

• Hiring and onboarding: we issue compliant contracts and get new joiners productive in days, with more in our guide to the employee onboarding process.
• Payroll and payments: we run payroll end to end, including statutory deductions and filings, with more in our guide to global payroll services.
• Benefits administration: we set up and administer health cover and the rest of the package, with more in our guide to EOR benefits administration.
• Compliance and classification: we stay accountable for the compliance record, with more in our guide to employer of record compliance.
• Contractor management: we onboard and pay contractors on the same platform, with more in our guide to 1099 contractors.

You can refer to our blogs for how the pieces fit together, starting with our global payroll guide.

We support global companies hiring in India through EOR, managed payroll, contractor management, and GCC setup. We are currently planning our expansion into future markets including the US and the UK.

What our clients say

"We've been using Wisemonk to support our India team for the past six months, and the experience has been excellent. They've handled everything from payroll and statutory compliance to equipment procurement and benefits enrollment, all with a level of responsiveness and professionalism that makes managing a remote India team from Canada feel seamless. Nileena and the team are always quick to reply and proactive about flagging anything we need to know. We'd happily recommend Wisemonk to other companies looking to hire and manage talent in India." Monika Russell, CFO, Minehub, Canada

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