What are state reciprocity agreements?

A state reciprocity agreement is an arrangement between two neighboring US states that lets a resident who works in one state and lives in another to pay state income tax only in their home state.

When an agreement is in place, the employer withholds based on where the employee lives, not where they work. For companies with cross-border commuters, that means one less state registration and a simpler withholding schedule.

How state reciprocity agreements work in payroll

Under a standard multi-state setup, an employer registers in every state where it has employees performing work and withholds income tax for each state. A state reciprocity agreement overrides that default. The employer withholds only for the employee's resident state and has no income tax withholding obligation in the work state for that employee.

No state reciprocity compact affects federal income tax withholding or Federal Insurance Contributions Act (FICA) obligations. Unemployment insurance, workers' compensation, and other state employment taxes also follow their own rules, and a state reciprocity agreement does not change them.

How employees claim a state reciprocity agreement exemption

The exemption is not automatic. The employee submits a withholding exemption certificate to the employer and requests that withholding switch from the work state to the resident state. Each work state that participates in a reciprocity agreement has its own certificate form.

Once the employer receives a completed certificate, it adjusts withholding going forward. The employee files a single resident-state return at year end. If the employer withheld for the work state before the certificate arrived, the employee typically files a non-resident return in the work state to claim a refund of those amounts.

Which states have reciprocity agreements

State reciprocity agreements exist between pairs of neighboring states, usually those with significant commuter traffic across a shared border. Not every state participates, and each compact covers only the two states that signed it.

See the table below for states that have reciprocity agreements:

An employee who lives in state A and commutes to state B can use the agreement only if A and B have one. If they also work occasionally in state C with no such agreement, that state's income tax rules apply separately.

States with no personal income tax on wages have no need for reciprocity agreements, since they impose no income tax to waive. Workers who live in such a state and commute into one that does levy income tax generally pay that tax to the work state.

When no reciprocity agreement applies

Without an agreement, an employee who lives in one state and works in another typically owes income tax to both. Most resident states allow a credit for taxes paid to the work state, which limits true double taxation, but the employee still files returns in both states.

The employer registers in the work state, calculates and withholds that state's income tax, and remits it on the usual schedule. Workers can still owe a balance at year end if their two-state withholding does not align with the final credit calculation.

What happens when a reciprocity agreement ends

States can terminate a reciprocity agreement. When that happens, the state revenue authority announces a future effective date, and employers must begin withholding for the work state from that date for all previously exempt employees.

Payroll teams that miss the cutover risk under-withholding and may face payroll tax penalties for late remittances. Employees also need to file returns in both states for the portion of the year after termination. Payroll teams that monitor state revenue authority bulletins regularly can catch these changes before they take effect.

Key facts

• Reciprocity agreements cover state income tax withholding only, not unemployment insurance, workers' compensation, or FICA.

• An employee files a work-state-specific withholding exemption certificate with the employer to activate the exemption.

• When no reciprocity agreement applies, the resident state generally allows a credit for taxes paid to the work state to prevent double taxation.

• States with no personal income tax on wages do not issue reciprocity agreements.

• When an agreement ends, employers must begin work-state withholding from the official effective date of termination.

• State revenue authorities announce changes to reciprocity agreements in advance, so payroll teams should monitor those bulletins on a regular cycle.

Managing reciprocity agreements with Deel

Deel Payroll (US) is built for companies that need compliant, automated US payroll and time tracking. We handle federal, state, and local payroll requirements while giving teams the flexibility to run payroll independently or with expert payroll support from our team.

FAQ

What taxes does a state reciprocity agreement cover?

State income tax is the only withholding a reciprocity agreement redirects. The employer remits that withholding to the employee's resident state rather than the work state, and the employee has no income tax return obligation in the work state. Unemployment insurance contributions, workers' compensation premiums, and FICA taxes follow separate rules that a reciprocity agreement does not change.

Does a reciprocity agreement apply to remote workers?

Reciprocity agreements apply to employees who physically commute to work in a neighboring state. A fully remote worker performs their duties in their home state, so the work-state income tax question rarely arises and reciprocity is usually not needed.

What should an employer do when an employee submits a reciprocity exemption certificate?

The employer updates payroll to withhold for the employee's resident state starting with the next payroll run. If the employer has already remitted withholding to the work state, the employee can reclaim those amounts by filing a non-resident return in that state.

What if an employer misses the cutover when a reciprocity agreement ends?

The employer should correct withholding as soon as it identifies the gap and consider filing a voluntary disclosure with the work-state revenue authority. Prompt action can reduce payroll tax penalties for the under-withholding period.

This entry is for general information only and is not a substitute for advice from a qualified tax adviser.