How State Reciprocal Agreements Affect Multistate Employees

How do state reciprocal agreements affect multistate employees?

State reciprocal agreements are arrangements between neighboring states (or a state and D.C.) that let residents who earn wages in a partner jurisdiction be taxed only by their home state, preventing double withholding and simplifying payroll and filing for eligible employees.
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How do state reciprocal agreements affect multistate employees?

State reciprocal agreements let many cross-border workers pay income tax only to their state of residence instead of both the state where they live and the state where they work. For wage and salary earners in eligible pairings, these agreements reduce the number of state returns to prepare, limit duplicate withholding, and cut administrative headaches for employers.

Below I explain how reciprocity typically works, who is — and isn’t — covered, common employer and employee steps, pitfalls to watch for, and practical planning tips I use with clients. I’ve worked with multistate commuters and remote workers for over 15 years, and in practice the biggest issues arise from incorrect withholding and failing to document residency.

Sources and further reading: see the FinHelp guides on Reciprocal State Tax Agreements: What They Mean for Commuters, How to file multi-state tax returns, and State Tax Withholding. For federal guidance on withholding procedures consult IRS Publication 505 (Withholding and Estimated Tax) and general consumer resources at ConsumerFinance.gov.

How reciprocity typically works (step-by-step)

  • States (or a state and D.C.) enter a formal agreement that allows residents of one jurisdiction to be exempted from income-tax withholding in the state where they work.
  • Eligible employees usually complete a state-level exemption or nonresident certificate and give it to their employer. States use different names for these documents (“reciprocal withholding form,” “certificate of nonresidence,” or a state-specific equivalent) rather than the federal Form W-4.
  • Once employers have the certificate, they stop withholding the work-state income tax and instead withhold only the employee’s home-state tax (or withhold nothing if the home state has no income tax).
  • At tax time, most affected employees only file a resident return in their home state; they don’t owe tax to the work state on wages covered by reciprocity.

Example pairings commonly encountered: Pennsylvania↔New Jersey, Ohio↔Indiana, Wisconsin↔Illinois, Maryland↔District of Columbia, and Virginia↔District of Columbia. These examples show how varied and geographically based agreements are — they exist to reduce commuter tax friction.

Who is covered — and who is not

  • Usually covered: wage and salary employees whose compensation is reported on a W-2 and who maintain residency in one of the reciprocal jurisdictions.
  • Usually not covered: self-employed individuals, independent contractors, business owners who have nexus in the work state, many types of commission or rental income, pensions and retirement distributions, and income from investments. If you have non-wage income tied to the work state, you may still need to file a nonresident return there.
  • Residency matters: reciprocity applies only if your home-state residency qualifies under that state’s rules. Living across a state line and working in the other state is the common scenario; each state’s tax agency defines residency for tax purposes.

Practical steps for employees

  1. Confirm whether your home state and work state have a reciprocity agreement. Check your home state’s Department of Revenue website or the work state’s withholding guidance. (See FinHelp’s internal guide linked above.)
  2. If the states have reciprocity, obtain and complete the required nonresident or reciprocity form and give it to your employer. Do this as soon as you start working or move across a border.
  3. Keep proof of residency in your home state: driver’s license, voter registration, lease or mortgage statements, and utility bills. These documents are useful if withholding errors trigger audits or refund claims.
  4. Monitor your paystubs during the first few pay periods after submitting the form to ensure the employer stopped withholding the work-state tax.
  5. If withholding is wrong, ask the payroll contact to correct it. If the employer can’t or won’t correct prior withholding, you may need to file a nonresident return in the work state to claim a refund.

Employer responsibilities and common operational issues

Employers must apply state withholding laws correctly. Common issues I see in practice:

  • Payroll systems default to withholding based on workplace location or the federal W-4, not the employee’s residency. Employers should accept the state reciprocity certificate and configure withholding accordingly.
  • Employers with remote workers in multiple states can be confused about which jurisdiction’s rules apply — especially when an employee teleworks from one state but occasionally works in another.
  • When an employee moves mid-year, employers and employees must coordinate to ensure proper withholding from the move date.

Employers who withhold incorrectly must typically file amended returns or refund the employee directly. Payroll teams should consult their state revenue department guidance and, when needed, a payroll tax specialist.

Common mistakes & misconceptions

  • “I’ll automatically be exempt from the work-state tax if I live nearby.” Not true — reciprocity requires a formal agreement and a submitted certificate.
  • Assuming reciprocity covers non-wage income. It usually doesn’t. Business, rental, or retirement income often remains taxable in the state sourced to that income.
  • Thinking a single form covers every state. Each reciprocal pair has its own form and timing rules.
  • Believing reciprocity is permanent. Agreements can change; always verify current rules before relying on them.

What to do if you get incorrectly taxed by the work state

  • Confirm whether the states have reciprocity and that you submitted the correct form to your employer.
  • If you were taxed incorrectly, first ask payroll to refund or stop the withholding going forward; get confirmation in writing.
  • If the employer cannot or will not correct prior withholdings, file a nonresident return in the work state to claim a refund for amounts withheld on wages covered by reciprocity. Save all paystubs and the reciprocity certificate.
  • File your resident return in your home state and claim any credit permitted for taxes paid to other states for income that is not covered by reciprocity.

Tax planning strategies and special situations

  • Split-telework and partial-year residency: If you telework from your home state but occasionally work in the other state, document where workdays occur. Some states use a day-count or convenience-of-employer rule to determine sourcing — consult a tax pro if you have mixed-location work.
  • Moving during the year: Update withholding with your employer immediately after changing your residence. You may need to file part-year resident returns.
  • Self-employment: Reciprocity usually does not help independent contractors. Expect to file nonresident returns if you have nexus in the work state or source income there.
  • Retirement and pensions: These often remain taxable by the state of residence and sometimes by the state where the income was earned; check state rules.

How reciprocity interacts with multi-state filing obligations

Reciprocity can eliminate the need for a nonresident wage tax return in the work state for reciprocated wages, but it does not eliminate multi-state filing obligations for other income types. If you earn wages covered by reciprocity but also have business income, rental income, or income from a separate employer without reciprocity, you may still file returns in both jurisdictions. For more on filing strategies, see our guide on How to file multi-state tax returns.

Documentation and audit preparation

If a state questions your claim of residency or the application of reciprocity, the documentation states commonly request includes:

  • A copy of the reciprocity certificate you submitted to your employer.
  • Proof of residence: driver’s license, voter registration, lease/mortgage, utility bills.
  • Paystubs showing withholding history.

Keep this documentation for at least three years after the tax year in question — that’s the typical statute of limitations many states follow for audit purposes.

When to consult a tax professional

  • Your work pattern spans multiple states, you telework regularly from another state, or you have mixed income types (wages plus business or rental income).
  • You move states mid-year or have complex residency questions.
  • An employer refuses to correct withholding errors or you face a costly audit.

In my practice, complex cases are often resolved more quickly when clients bring payroll records and residency documents to the first meeting — it speeds analysis of which wages qualify for reciprocity and which do not.

Quick checklist

  • Verify reciprocity between your home and work state.
  • Complete and submit the state reciprocity/nonresident form to your employer.
  • Check paystubs to confirm correct withholding.
  • Keep residency proof and paystubs.
  • File a resident return in your home state; file a nonresident return only if needed for non-wage income or incorrectly withheld wages.

Professional disclaimer

This article is educational and does not constitute tax, legal, or accounting advice. State rules and agreements change; consult your state tax agency or a tax professional about your specific facts. For federal withholding guidance, see IRS Publication 505. For consumer-facing information on state taxes and withholding, see ConsumerFinance.gov.

Author note

I’m a financial educator and CFP® with more than 15 years helping clients manage multistate tax issues. In practice, careful early communication with employers and timely submission of state reciprocity forms prevent the majority of withholding problems I encounter.

Authoritative sources and further reading

If you’d like, I can review the reciprocity rules for a specific state pair or draft a sample correspondence you can send to your employer’s payroll department.

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