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:
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.
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