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Understanding State Tax Reciprocity Agreements

In the United States, federal taxes apply to all employees no matter which state they live in the country. Additional state taxes are levied on the employees, and the rates vary with every state.

However, state taxes get very complicated when an employee is a resident of one but is employed in another. To simplify this conundrum, U.S. laws have established state tax reciprocity agreements. These are agreements between two states regarding home and work taxes, so the employee does not end up paying twice the necessary amount. Thanks to this agreement, the employee will only pay taxes for their home state and remains tax-exempt in their work state.

States With Reciprocal Tax Agreements

There are 16 states in the U.S. that have reciprocity agreements with other states. The table below mentions these states and the forms employees must fill out to report state tax reciprocity:

Arizona California, Indiana, Oregon, Virginia Form WEC
District of Columbia All nonresidents who work in the district can claim exemption from withholding for the District of Columbia income tax. Form D-4A
Illinois Iowa, Kentucky, Michigan, Wisconsin Form IL-W-5-NR
Indiana Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin Form WH-47
Iowa Illinois Form 44-016
Kentucky Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, Virginia Form 42A809
Maryland District of Columbia, Pennsylvania, Virginia, West Virginia Form MW 507
Michigan Wisconsin, Indiana, Kentucky, Illinois, Ohio, Minnesota Form MI-W4
Minnesota Michigan, North Dakota Form MWR
Montana North Dakota Form MW-4
New Jersey Pennsylvania Form NJ-165
North Dakota Minnesota, Montana Form NDW-R
Ohio Indiana, Kentucky, Michigan, Pennsylvania, West Virginia Form IT-4NR
Pennsylvania Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia Form REV-419
Virginia Kentucky, Maryland, District of Columbia, Pennsylvania, West Virginia Form VA-4
West Virginia Kentucky, Maryland, Ohio, Pennsylvania, Virginia Form WV/IT-104

What If My State Does Not Have a Tax Reciprocity Agreement?

No U.S. employee has to pay state taxes twice, even in states without any reciprocity agreements. If an employee’s work and work states do not have tax reciprocity agreements, they still have nothing to worry about. Two states without a tax reciprocity agreement may have a tax credit agreement in place. These credit agreements ensure that after the employee has paid state income tax in their working state, they receive tax credits from their home state. Hence, the employee may be required to file multiple tax returns, but they will not be double-taxed.

It is important to note that the amount of home and work state taxes are crucial to the final tax amount. If the employee’s home state has a higher state tax than their work state, they owe more to the former. However, if the work state has a higher state tax than the home state, the employee must wait for a refund.

How To Report Tax Reciprocity?

The employer must ensure that their employees, who belong to states with tax reciprocity agreements, always fill out the right form. Usually, an employer withholds the state tax for the employee’s work state. The employee must request the employer to withhold the state tax from their home state and submit a filled-out state tax exemption form.

At the end of the year, the employer must fill out Form W-2 to notify the employee how much state income tax has been withheld from them.

File Payroll Taxes Hassle-free With Multiplier

The sheer number of tax laws and forms in the U.S. are a major hassle for businesses. However, tax compliance is mandatory for the smooth running of your business, and you cannot opt out of it. You can, however, partner with a service provider who manages all aspects of your global teams, right from onboarding and their taxes.

Multiplier’s EOR solutions simplify payroll and tax maintenance by organizing all your invoices and relevant payment details in one window. A few clicks and you will know how much you need to pay for an employee without any double taxation or extra effort.

Avoid compliance hassle and seamlessly manage your global team, anywhere, anytime, with Multiplier.

Will Smith
Will Smith

Content Writer

Will is a Content Writer at Multiplier. With a background in technology journalism, he is passionate about busting jargon, getting to the heart of complex topics, and writing pieces you'll enjoy reading.

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