Reciprocal State Tax Agreements: What They Mean for Commuters

Overview
Reciprocal state tax agreements (often called “reciprocity”) are state-to-state arrangements that let people who live in one state but work in another pay income tax only to their state of residence for wages earned as employees. For many commuters, reciprocity simplifies payroll withholding — you avoid having the work state take tax out of your paycheck — but it doesn’t remove your responsibility to file a tax return in your home state.

Why reciprocity exists
States use reciprocity to reduce administrative burden for both taxpayers and employers. Without an agreement, a commuter who lives in State A and works in State B could face tax withholding in State B and then must claim a credit on State A’s return for taxes paid to another state. Reciprocal agreements remove the need for that extra step for wages, though other income types may still be taxed by the work state.

How reciprocity works in practice

• Employer withholds resident-state tax: If your state has a reciprocal agreement with the state where you work, your employer should withhold taxes for your home state instead of the work state once you supply the proper exemption form.
• You still file a resident return: You must file a tax return in your state of residence reporting all income (including wages from out-of-state work). Pay any balance due, claim any credits, and reconcile withholding.
• Non-wage income is usually unaffected: Self-employment income, rental income, capital gains, and some retirement income are typically taxed by the state where they are earned or where you’re a resident, depending on state law.

What you need to do (step-by-step)

1. Verify whether your states have a reciprocal agreement: Start by checking your state’s Department of Revenue or tax agency website. If you need background on multi-state filing generally, see our guide How to file multi-state tax returns.
2. Complete the correct withholding exemption form: Most states require a state-specific form (not the federal W-4) to claim exemption from nonresident withholding. Submit that form to your employer or payroll department. If you’re unsure which form to use, contact your state revenue office or HR.
3. Confirm payroll changed: Check paystubs after submitting the form to ensure the work-state tax stopped and your resident-state tax is being withheld (if applicable).
4. Keep records: Save a copy of the exemption form and correspondence with your employer. These can be essential if there is a dispute or incorrect withholding.
5. File your resident return: Even when reciprocity applies, you must file a tax return in your resident state. Reconcile withheld taxes, claim credits, and report non-wage income as required.

Example
Imagine you live in State A (resident tax rate 5%) and work in neighboring State B, which has a reciprocal agreement with State A. If your employer follows the agreement, they will withhold State A tax (5%) from your paycheck, not State B tax. You then file only one resident return in State A, report your wages, and either pay or receive a refund depending on your final liability.

Common exceptions and pitfalls

• Non-wage income: Income from self-employment, rental properties, partnerships, and sole proprietorships is normally taxed by the state where that income is earned. A reciprocal agreement usually covers only wage income as an employee.
• Pensions and retirement: Some reciprocal agreements do not affect taxation of retirement income. State rules vary — many states tax pension income only to the state of residence, but some tax distributions where they are paid.
• Local taxes: City or local income taxes are separate from state reciprocity. For example, some cities tax nonresidents who work within city limits even if the states have reciprocity.
• Telecommuting and remote work days: Remote work has complicated reciprocity. Some states use a “convenience of the employer” standard, where days you work from home for your own convenience may still be taxed by the employer’s state. Other states tax based on the employee’s work location (where the computer is) or employer location. If you split time across states, track days and consult state guidance.
• Withholding errors: Employers sometimes withhold the work-state tax by mistake. If that happens, you can either request a refund from the work state by filing a nonresident return or ask your employer to reverse the withholding and reissue payroll for that year.

When you might still file a nonresident return
Even with reciprocity for wages, you may need to file a nonresident return in the work state if:

• You received income in the work state that is not covered by the agreement (self-employment, rental, capital gains sourced to that state).
• You were incorrectly taxed and need a refund for state withholding.
• Your situation changed mid-year (moved, changed jobs, or switched residency).

Telecommuting example
Suppose you live in State A with a reciprocity agreement with State B, where your employer is located. You work remotely from home in State A three days a week and commute to State B two days a week. Whether State B can tax your wages for the two in-office days, or for all days, depends on its rules for part-year nonresidents and remote-work sourcing. Keep detailed time logs and check state policy. If taxed incorrectly, you may be able to claim a refund or an exemption depending on facts and state law.

What to do if your employer refuses or is slow to change withholding

• Provide the correct state exemption form in writing and keep a copy.
• Escalate to payroll/HR with a polite request and a deadline.
• If the employer still refuses, file a nonresident tax return in the work state to claim a refund of the withheld state tax, and continue filing your resident return to reconcile taxes owed.

Record-keeping and documentation
Good documentation helps resolve disputes: saved copies of withholding forms, paystubs before and after the change, time logs for remote work, written communications with payroll, and proof of residency (driver’s license, voter registration) if needed.

Where to find authoritative guidance

• Your state Department of Revenue or tax agency website lists current reciprocal agreements and the correct withholding form. Search “reciprocal agreements” plus your state name.
• For general multi-state tax issues see our article How do state residency rules affect taxation? and our guide Understanding State Income Tax. Also consult State Tax Withholding for employer-side rules on exemptions.

When to get professional help
Consider a tax pro if your situation is complex: multiple state incomes, a career change involving commuting across states, significant remote work, or large non-wage income. A CPA or enrolled agent experienced in multi-state taxation can help minimize double taxation and file the right returns.

Final tips for commuters

• Don’t assume: Always confirm reciprocity before you rely on it. Reciprocal agreements can change and may not cover every income type.
• Use the right forms: The federal W-4 does not affect state reciprocity. Submit the state-specific withholding form your resident state requires.
• Track remote work: Keep a simple log of work locations and days to support sourcing if states question your withholding.
• Review paystubs: After submitting forms, check payroll to ensure correct withholding and correct any mistakes early.

Additional resources

• How to file multi-state tax returns: https://finhelp.io/glossary/how-to-file-multi-state-tax-returns/
• How do state residency rules affect taxation?: https://finhelp.io/glossary/how-do-state-residency-rules-affect-taxation/
• State Tax Withholding: https://finhelp.io/glossary/state-tax-withholding/
• Understanding State Income Tax: https://finhelp.io/glossary/understanding-state-income-tax/

External authority
For general state tax research and links to state tax agencies, see the Federation of Tax Administrators (https://www.taxadmin.org).

Bottom line
Reciprocal state tax agreements can remove the hassle of double taxation on wages for many commuters, but they are narrowly focused on employee wages and can be limited by remote-work rules, non-wage income, and local taxes. Verify your state’s agreement, use the correct withholding form, monitor payroll, and consult a tax pro if your multi-state picture is complicated.