Compliance
Understanding State Tax Reciprocity Agreements: Simplifying Cross-State Taxation

In the United States, federal taxes are an inevitable reality for all employees, regardless of the state they call home. To add complexity to this fiscal landscape, state taxes also come into play, each state setting its own rates and rules.

However, the complexity of state taxes intensifies when an employee resides in one state but works in another. To address this tax quandary, U.S. laws have established state tax reciprocity agreements. These agreements are bilateral arrangements between two states concerning home and work-related taxes, designed to prevent employees from shouldering a double tax burden. Thanks to these agreements, employees are only required to pay taxes to their home state and are exempt from taxation in their work state.

States Embracing Tax Reciprocity Agreements


Currently, 16 states in the United States have embraced tax reciprocity agreements with other states. The following table provides a list of these states and the requisite forms that employees must complete to report their participation in these reciprocity programs:  


STATERECIPROCAL AGREEMENT STATESFORMS REQUIRED
ArizonaCalifornia, Indiana, Oregon, VirginiaForm WEC
District of ColumbiaAll nonresidents who work in the district can claim exemption from withholding for the District of Columbia income tax.Form D-4A
IllinoisIowa, Kentucky, Michigan, WisconsinForm IL-W-5-NR
IndianaKentucky, Michigan, Ohio, Pennsylvania, WisconsinForm WH-47
IowaIllinoisForm 44-016
KentuckyIllinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, VirginiaForm 42A809
MarylandDistrict of Columbia, Pennsylvania, Virginia, West VirginiaForm MW 507
MichiganWisconsin, Indiana, Kentucky, Illinois, Ohio, MinnesotaForm MI-W4


STATERECIPROCAL AGREEMENT STATESFORMS REQUIRED
MinnesotaMichigan, North DakotaForm MWR
MontanaNorth DakotaForm MW-4
New JerseyPennsylvaniaForm NJ-165
North DakotaMinnesota, MontanaForm NDW-R
OhioIndiana, Kentucky, Michigan, Pennsylvania, West VirginiaForm IT-4NR
PennsylvaniaIndiana, Maryland, New Jersey, Ohio, Virginia, West VirginiaForm REV-419
VirginiaKentucky, Maryland, District of Columbia, Pennsylvania,
West Virginia
Form VA-4
West VirginiaKentucky, Maryland, Ohio, Pennsylvania, VirginiaForm WV/IT-104

What If Your State Lacks a Tax Reciprocity Agreement?

Even if an employee's work and home states lack a tax reciprocity agreement, they need not be concerned about paying state taxes twice. Some states without reciprocity agreements have tax credit arrangements in place. These credit agreements ensure that after an employee has paid state income tax in their work state, they receive tax credits from their home state. Consequently, employees may be required to file multiple tax returns, but double taxation is not on the table.

It is crucial to remember that the relative tax rates of the home and work states play a pivotal role in determining the final tax liability. If an employee's home state imposes a higher state tax rate than their work state, they will owe more to their home state. Conversely, if the work state imposes a higher state tax rate than the home state, the employee can anticipate a refund.

How to Navigate Tax Reciprocity Reporting


For employers located in states with tax reciprocity agreements, it is incumbent upon them to ensure that their employees complete the necessary forms accurately. Typically, an employer withholds state taxes for the employee's work state. In addition, employees need to request their employer to withhold state taxes for their home state and submit a completed state tax exemption form.

At the close of the fiscal year, employers are responsible for filling out Form W-2, which provides employees with a summary of the state income tax that has been withheld from their earnings. This facilitates transparency and ensures employees stay compliant with their tax obligations.