Tax Reciprocity States: How to File Taxes Based on Reciprocal Tax Agreements
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- Reciprocal tax agreements or reciprocal agreements prevent double taxation for employees who live in one state but commute to another for work.
- If two states have a tax reciprocity agreement, the employee can submit an exemption form to pay state income taxes in their home state (and not in their work state) when filing an individual income tax return.
- Not all states have tax reciprocity agreements—if there’s no agreement between your home and work states, you need to file taxes in both states when completing your tax return. However, you have the right to a tax refund, as your resident state will provide you with a tax credit to avoid paying double taxes.
In the US, each state has a unique set of laws that may differ from federal law, including payroll and employment laws. For example, US minimum wages are not the same in all 50 states. 30 of them set the minimum wage above the federal minimum.
The same goes for reciprocity tax, most commonly known as an international issue. The US has tax treaties with over 60 countries that prevent employees from having to pay income taxes in their country of residence and country of employment. But double taxation isn’t only an international issue. US citizens may experience double taxation between states when they live in one state and commute to another for work.
In this article, you will learn which states have agreements that allow employees to pay taxes only in their home state and what forms you need to ensure you only pay your state income taxes once.
Disclaimer: This information is provided for informational purposes only and should not be considered tax or legal advice. Consult a tax professional for help.
What does reciprocity agreement mean?Reciprocal agreements prevent double taxation for employees who live in one state, but commute to another for work. If the two states have a tax reciprocity arrangement, the employee can submit an exemption form to pay state income taxes in their home state (and not in their work state) when filing an individual income tax return.
For example, employees who live in Maryland and work in Virginia can file exemption Form VA-4 to exempt themselves from tax withholding in Virginia, which is their employment state, and only pay taxes in Maryland.
The US government only put reciprocal tax agreements into effect in 2015. The US Supreme Court sided with taxpayers in the case of Maryland, a state which didn’t grant a tax exemption to workers employed outside of Maryland. From this moment on, Maryland could not collect taxes on the same income twice.
Which states have tax reciprocity agreements?
Working across state lines may be complex because employees must file specific tax forms to avoid double taxation. But at least they don’t have to withhold taxes from their income twice. States with reciprocity agreements include the following:
Arizona is a reciprocal state with a tax agreement with California, Indiana, Oregon, and Virginia.
If you’re employed in Arizona and live in one of these four states, submit Form WEC (Employee Withholding Exemption Certificate) to be exempt from Arizona income taxes. You need to submit this form to the employer at the beginning of every calendar year to prove you still no longer live in Arizona.
District of Columbia (Washington)
Washington D.C. has a tax reciprocity agreement with every US state.
To be eligible for the benefits of tax reciprocity in D.C., you need to be a resident of another state and spend fewer than 183 days per year in D.C. D.C. has the most all-encompassing reciprocity agreements because so many government representatives travel to and from their home states for work.
Employees need to submit Form D-4A (Certificate of Nonresidence) to be exempt from D.C. income tax.
Illinois has a tax reciprocity agreement with Iowa, Kentucky, Michigan, and Wisconsin.
Illinois workers who live in one of these four states can request income tax exemption by filing Form IL-W-5-NR (Employee’s Statement of Nonresidence).
Indiana has a tax reciprocity agreement with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin.
To be exempt from paying double taxes on your income if employed in Indiana, submit Form WH-47 (Certificate Residence). In case you reside in a state that doesn’t have a tax reciprocity agreement with Indiana, you can apply for a tax credit in this state.
Iowa has a tax reciprocity agreement with Illinois only.
If you work in Iowa but live in Illinois, you can file Form IA 44-016 (Employee’s Statement of Nonresidence) to request income tax exemption in Iowa and pay Illinois taxes only.
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Kentucky has a tax reciprocity agreement with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin.
Note that the Ohio agreement is conditional: if you live in Ohio but work in Kentucky, you can’t be a shareholder with over 20% equity in an S corporation. In Virginia, you need to commute to Kentucky daily for the tax agreement to apply.
To request tax exemption from double taxation in Kentucky, file Form 42A809.
Maryland has a tax reciprocity agreement with D.C., Pennsylvania, Virginia, and West Virginia.
Employees who work in Maryland but live in one of these four states should file Form MW507 (Employee’s Maryland Withholding Exemption Certificate).
Michigan has a tax reciprocity agreement with Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin.
To apply for tax exemption in Michigan, employees submit Form MI-W4 (Employee’s Michigan Withholding Exemption).
Minnesota has a tax reciprocity agreement with Michigan and North Dakota.
If you work in Minnesota and live in Michigan or North Dakota, file Form MWR (Reciprocity Exemption Certificate). Note that employees need to return to their state of residence once per month to maintain their right to tax exemption.
Montana has a tax reciprocity agreement with North Dakota.
Montana workers with residence in North Dakota apply for tax exemption by filing Form MW-4 (Montana Employee Withholding Allowance and Exemption Certificate).
New Jersey is a reciprocal state with a tax agreement with Pennsylvania only.
To apply for this tax exemption, Pennsylvania residents who work in NJ can submit Form NJ-165 (Employee’s Certificate of Nonresidence in New Jersey).
North Dakota has a tax reciprocity agreement with Minnesota and Montana.
Residents of these two states who work in North Dakota can apply for tax exemption by filing Form NDW-R.
Ohio has a tax reciprocity agreement with Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia.
Residents of these five states who work in Ohio can submit Form IT 4NR (Employee’s Statement of Residency) to avoid being double-taxed on their income.
Pennsylvania has a tax reciprocity agreement with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia.
If you reside in one of these six states but are employed in Ohio, apply for tax exemption by filing Form REV-419 EX (Employee’s Nonwithholding Application Certificate).
Virginia has a tax reciprocity agreement with D.C., Kentucky, Maryland, Pennsylvania, and West Virginia.
To apply for tax exemption when you work in Virginia and live in one of the above states, submit Form VA-4 (Personal Exemption Worksheet).
West Virginia has a tax reciprocity agreement with Kentucky, Maryland, Ohio, Pennsylvania, and Virginia.
Employees who work in West Virginia, but live in one of these five states, need to submit Form IT-140NRS to apply for tax-exempt status.
Wisconsin has a tax reciprocity agreement with Illinois, Indiana, Kentucky, and Michigan.
If an employee works in Wisconsin but resides in one of the mentioned four states, they can apply for tax exemption by filing Form W-220 (Nonresident Employee’s Withholding Reciprocity Declaration).
FAQs about tax reciprocity agreements
What do you do if your state doesn’t have a tax reciprocity agreement?
Not all states have a tax reciprocity agreement—if your home is a non reciprocal state, meaning there’s no such agreement between your home state and work state, your employer withholds taxes based on the law in the state where you work.
You need to file taxes in both states when completing your tax return, which requires some extra work at the end of the tax year. However, you have the right to a tax refund, as your resident state will provide you with a tax credit to avoid paying double taxes.
What’s the employer’s role in state reciprocity?
Employers must stop withholding taxes from their employee’s income for the state they work in as soon as they submit the corresponding state tax reciprocity tax form. They should apply the employee’s resident state’s tax laws when calculating how much of their total income to withhold.
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Does reciprocity apply to local taxes?
Yes, reciprocity agreements apply to local and state taxes only, not to federal taxes. Employers still need to withhold federal income tax from the employee’s paycheck.
What states have no income tax?
Nine US states don’t have income tax:
- New Hampshire
- South Dakota
Note that all these states except New Hampshire don’t levy state income taxes on individuals, while New Hampshire taxes dividends and interest but not earned wages.
Do you get double-taxed if you work in a different country?
If you live outside of the US, your income is considered taxable in your country of residence as it’s not US-sourced. However, if you’re a US citizen, your income is still subject to US taxes, but you may qualify for tax credits or exclusions. The rules are also different for US expats who work abroad.
Do tax reciprocity agreements affect independent contractors?
No, they don’t. Tax reciprocity agreements only apply to employees and employee compensation, while self-employment income is excluded from the agreements.
Steve Hoffman, Strategic Partnerships, Deel
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