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.
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:
STATE | RECIPROCAL AGREEMENT STATES | FORMS REQUIRED |
---|---|---|
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 |
STATE | RECIPROCAL AGREEMENT STATES | FORMS REQUIRED |
---|---|---|
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 |
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.
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.
Easy to start,
intuitive to use