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- State tax reciprocity is an agreement that lets employees pay income tax only in their home state even if they work in another, preventing double taxation on wages.
- To use reciprocity, employees must file a state-specific exemption form with their employer so taxes are withheld only for their home state. Without it, the work state will tax their wages.
- The states having reciprocity agreements are about 15 plus D.C., including common commuter corridors like Pennsylvania–New Jersey, Virginia–District of Columbia, and Illinois–Wisconsin. Each state has its own exemption form.
- In states without tax reciprocity agreements, employees must file in both their home state and work state. This means a resident return at home, a nonresident return in the work state, and usually a tax credit to avoid double taxation.
Need help understanding tax reciprocity rules? Talk to our experts today!
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Confused about how state taxes work when you live in one state but work in another? You’re not alone; thousands of employees and employers run into the same headache every year.
Many U.S. businesses, founders, and global teams struggle with state tax reciprocity because the rules aren’t always clear. Should employees pay taxes twice? Which forms are required? And how can payroll teams avoid costly mistakes?
The good news is, reciprocity agreements exist to simplify this mess. In this article, we’ll break down what reciprocity really means, which states have agreements, what forms to file, and how employers can stay compliant, so you can handle multi-state payroll with confidence. Let’s dive in.
What is State Tax Reciprocity?[toc=State Tax Reciprocity]
State tax reciprocity refers to an agreement between two or more states that allows employees to pay taxes only in their state of residence, even if they work in a different state.
Essentially, if you live in one state and work in another, you won't be double-taxed by both states. Instead, the state where you live will typically give you a credit for taxes paid to the state where you work, ensuring you're not taxed twice on the same income.
Key characteristics of state tax reciprocity:
- Applies only to wages and salaries, not other types of income like interest or dividends.
- Requires employees to submit a state-specific nonresident form to their employer.
- Covers only state income taxes, local or city wage taxes may still apply.
- Each agreement is state-specific; not all neighboring states have reciprocity.
- Helps employees by simplifying tax filing and avoiding duplicate returns.
Fact: According to the Tax Foundation, about 15 states plus D.C. currently have active reciprocal tax agreements, covering millions of cross-border workers.
Types of State tax reciprocity agreements
Reciprocity agreements come in two main forms, depending on how states choose to handle cross-border taxation.
Bilateral Agreements
Bilateral agreements are mutual pacts between two states, allowing workers to pay income taxes only to their state of residence. For example, residents of Pennsylvania who work in New Jersey only pay taxes to Pennsylvania. Most reciprocity agreements in the U.S. follow this bilateral model.
Unilateral Agreements
Unilateral agreements occur when one state independently decides to extend tax reciprocity to workers from other states, without requiring a matching agreement in return. A common example is Washington, D.C., which offers this treatment to non-residents even if their home state doesn’t reciprocate.
Which States Have Reciprocity Agreements?[toc=State with Reciprocity]
From running multi-state payroll setups, we know how critical it is to identify which states honor reciprocity before processing employee withholdings.
Here’s the full list of states with reciprocity agreements and the forms employees must file:
These agreements help reduce the tax burden for workers by ensuring they are only taxed in their state of residence. Now let's explore which states do not require income tax for non-resident employees working there.
Which states do not have income tax for non-resident employees?[toc=No-income-tax states]
Our experience guiding companies through cross-border compliance shows that no-income-tax states can be just as tricky when payroll reporting is involved.
Here are a few notable states with no income tax for non-resident workers, according to Investopedia
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Now let's find out who benefits from reciprocity agreements.
Who Benefits from Reciprocity Agreements?
Reciprocity agreements bring advantages to both states and individuals. These agreements encourage economic growth by reducing the tax burden on cross-border workers, making it easier for businesses to expand and hire talent from neighboring states.
States with higher taxes can attract more businesses and workers, while lower-tax states retain their residents who may otherwise consider relocating for tax benefits.
Benefits for Employees:
- Avoid Double Taxation: Employees only pay taxes to their state of residence, reducing their overall tax burden.
- Simplified Tax Filing: Employees are only required to file taxes in their home state, making compliance easier, especially for those with hybrid or remote work schedules.
- Incentives to Relocate: Employees may be more likely to live in a lower-tax state without worrying about taxes on income earned in a neighboring state.
Benefits for Employers:
- Easier Expansion: Businesses can hire workers from neighboring states without facing the administrative burden of managing multiple state tax systems.
- Attractive Work Opportunities: Reciprocity agreements make it easier for employees to work in one state while living in another, increasing the talent pool for employers.
- Simplified Payroll Management: Employers have less complexity in calculating and withholding taxes, reducing compliance costs and risks.
In summary, reciprocity agreements not only streamline tax compliance but also foster economic growth by promoting job creation and facilitating the ease of doing business across state lines.
What are the steps for non-residents working in states without tax reciprocity?[toc=Steps for non-reciprocal states]
When employees work remotely or in a different state, it can be unclear whether they're covered by state tax reciprocity agreements.
This confusion may lead to concerns about double taxation and unexpected filing expenses. If your company is located in a state without a reciprocity agreement,
Here are the key steps non-residents must follow when reciprocity doesn’t apply.
- Inform Employees Early: Clearly communicate with employees about the lack of reciprocity agreements so they can prepare for potential tax filings in both their home state and the state where they work.
- Withhold Taxes for Both States: Employers may need to withhold taxes for both the employee's home state and the state where the business operates. Research the tax laws for each state to ensure compliance.
- Provide Tax Forms: At the end of the year, provide employees with the correct tax forms to help them file their state returns accurately.
- Explore Tax Credits: Employees may be eligible for income tax credits to offset the taxes paid to both states, minimizing the impact of double taxation.
Though employees may not face the full burden of paying taxes for both states, they still need to file taxes correctly. Fortunately, many states offer tax credits or refunds to alleviate the risk of double taxation.
Pro tip: Always check both your resident state and work state Department of Revenue sites before filing, since rules can change annually.
Do I need to file taxes in two states?[toc=Filing in two states]
Managing compliance for employees who live in one state and work in another is part of our daily payroll support, so we know when dual filings apply. You only need to file taxes in two states if your home state and your work state don’t have a reciprocity agreement. If they do, you’ll usually just file in your home state.
Key Scenarios:
- Reciprocity states: File only in your home state (work state won’t tax your wages if you file the right form).
- No reciprocity: File in both states, a resident return in your home state and a nonresident return in your work state.
- Credits for taxes paid: If you file in two states, your home state often gives you credit for what you already paid to the work state.
- Remote workers: If you work fully from your home state, you usually don’t need a work-state return, even if your employer is based there.
- Special rules: Some states (like New York with “convenience of the employer” rule) may still tax you even if you live elsewhere.
Fact: According to the U.S. Census Bureau, nearly 8% of U.S. workers are cross-border commuters, many of whom face dual tax filing challenges.
What forms do I need to claim reciprocity?[toc=Claiming Reciprocity Forms]
Because we set up compliant payroll and onboarding for global companies, we deal with the exact state forms employees must file to avoid double withholding.
To claim reciprocity, you usually give your employer a state-specific form that says “don’t withhold taxes for the work state.” This proves you’re a resident of another state.
These are the exact forms employees must submit to claim reciprocity.
Steps and Examples:
- Find your state’s form: Each state with reciprocity has its own nonresident or exemption form.
- Example: PA REV-419 (Pennsylvania)
- Example: IL-W-5-NR (Illinois)
- Example: VA Form 763-S (Virginia)
- Fill out the form with your residency details: You confirm you live in one state but work in another.
- Give the form to your employer’s payroll team: This stops the work state from withholding income tax.
- Keep a copy for your records: You may need it if there’s an audit or mismatch later.
- Update the form if you move or change jobs: Forms are usually valid until you update your residency.
Filing the right exemption form on time ensures your payroll deductions are accurate and prevents surprise tax bills.
Exemption forms are only part of payroll compliance, see our guide on "How the W-4 Form Works" for the federal side.
Does reciprocity cover city taxes and special rules?[toc=City taxes & special rules]
Helping businesses stay compliant has shown us that reciprocity rarely touches city-level wage taxes, so employers must plan payroll deductions carefully. Reciprocity only applies to state income taxes. It usually does not cover city wage taxes or special state rules like “convenience of the employer.”
Here’s how local taxes and special state rules interact with reciprocity.
- City wage taxes: Local income taxes (like in Philadelphia, Detroit, or some Ohio cities) still apply, even if states have reciprocity.
- School district taxes: In states like Ohio, separate school district income taxes aren’t covered by reciprocity.
- Convenience of the employer rule: States like New York and Delaware may tax you if your job is based there, even if you work remotely elsewhere.
- County-level add-ons: Some states allow counties to levy extra income taxes, reciprocity won’t cancel those.
- Employer responsibility: Payroll teams must withhold for local obligations separately from state rules.
What should employers do to handle reciprocity in payroll?[toc=Employer payroll steps]
Our experience running EOR payroll for distributed teams proves that setting up withholding correctly from day one is the employer’s biggest responsibility. Employers need to set up payroll so the right state gets tax withheld from day one.
These are the payroll actions employers need to take for compliance:
- Collect nonresident forms: Get the employee’s reciprocity certificate (e.g., PA REV-419, IL-W-5-NR).
- Set resident state in payroll software: Mark the home state as the tax state, not the work state.
- Stop work-state withholding: Ensure your system doesn’t take out duplicate state tax.
- Review regularly: Update when employees move, switch offices, or change remote work status.
- Keep records: Store copies of forms for compliance and audits.
You might also find our article on "Global Payroll for International Employees", useful if you’re exploring how to manage compliance, taxes, and payroll for teams across multiple countries.
What are some common state examples of reciprocity?[toc=Common state examples]
Through our work supporting employers in complex state pairings, we’ve seen how certain reciprocity agreements, Play out in payroll.
Here are some of the most common state reciprocity agreements workers deal with:
- Pennsylvania & New Jersey: Residents pay only in their home state, avoiding double taxation across the Delaware River.
- Virginia, Maryland & Washington, D.C.: Major commuter hub, reciprocity keeps workers from filing in two places.
- Illinois & Wisconsin: Covers many Midwest commuters moving across the state line.
- Indiana & Michigan, Ohio, Kentucky, Pennsylvania, Wisconsin: Indiana has several active agreements for cross-border workers.
- Minnesota & North Dakota: Simplifies taxes for residents working across the border.
These agreements mean you usually only file taxes in your home state, not the state where you work.
Conclusion
In conclusion, state tax reciprocity agreements provide a valuable way for employees and employers to avoid double taxation and simplify tax filing. These agreements not only reduce administrative burdens but also foster economic growth by making it easier for businesses to hire and retain talent across state lines.
However, managing HR overseas presents its own set of challenges, especially when dealing with cross-border payroll, tax compliance, and remote workforce management.
Wisemonk offers a seamless solution for global companies hiring in India, acting as an Employer of Record (EOR) to handle payroll, compliance, and HR tasks. With Wisemonk, businesses can tap into India’s talent pool without setting up a local entity, ensuring smooth operations across borders.
Managing an international workforce has never been easier with the right partner. Get in touch with us today for tailored pricing or reach out for more information on how Wisemonk can streamline your global HR processes.
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