What is State Income Tax Reciprocity and How Does It Affect Commuters?

State income tax reciprocity (often shortened to “reciprocity”) is a limited, state-to-state agreement that changes who taxes wages earned by people who live in one state and work in another. Instead of having the work state withhold income taxes as if you were a nonresident, a reciprocal agreement lets employers exempt those wages from nonresident withholding if you declare residency in the partnering state. The result: most or all wage income is taxed only by your state of residence, not by both states.

This article explains how reciprocity works, who typically qualifies, what forms and employer steps are required, common misunderstandings, and practical steps I use with clients to avoid surprise tax bills. It also explains when reciprocity does not help — for example, when you have source income (rental, business income, or in-state services) or when remote work rules create tax nexus.

Sources and further reading: IRS guidance on state income tax issues (irs.gov), state revenue department sites, and practical state-tax summaries (see internal links at the end).

Why this matters: commuters who don’t claim reciprocity correctly can have state income tax withheld by the work state, creating cash-flow problems during the year and forcing them to file returns in two states to reclaim withheld taxes. In my practice I regularly see clients who recovered thousands in withheld taxes after filing the correct nonresident exemption or withholding certificate with their employer.

Who typically benefits

  • Daily commuters who live in State A and work in adjacent State B.
  • Residents who perform the bulk of their work in another state but maintain primary legal residence in their home state.

Who reciprocity usually does NOT cover

  • Independent contractors, freelancers, or business owners who are taxed on source-of-income rules rather than wage withholding.
  • People who earn income in multiple states — reciprocity may apply only to wages from a particular employer in the reciprocal state.
  • Remote employees who perform work from a different state may still be taxed under that state’s sourcing rules, depending on state law and employer payroll practices.

How reciprocity works in practice

  1. Confirm whether a reciprocal agreement exists. Each reciprocal relationship is set by state statute or administrative rule — there is no single federal list. Most agreements are regional (Mid-Atlantic and Midwest examples are common). Check your state revenue department website for up-to-date lists (for example, Pennsylvania’s Department of Revenue and other state sites).

  2. Complete the employer’s exemption or withholding form. If a reciprocal agreement applies, you must provide your employer a state-specific withholding certificate claiming exemption from the work-state withholding. These forms are not federal Form W-4; states use their own withholding certificates or reciprocity forms. Employers then stop withholding the work-state tax on wages covered by the agreement.

  3. File your resident state return as usual. Your state of residence will tax the wages and may provide a credit or simply be the only taxing state for those wages. Keep copies of the withholding-exemption certificate for your records.

  4. If mistakenly withheld, file a nonresident/part-year return in the work state to claim a refund for taxes withheld on wages covered by reciprocity.

Common forms and employer actions

  • States typically have a named reciprocity or nonresident withholding certificate (example names: “Certificate of Nonresidence/Reciprocity” or a state W-4 equivalent).
  • Employers are responsible for following withholding instructions once they receive a valid certificate, though many payroll departments are unfamiliar with reciprocity nuances — you will sometimes need to escalate to payroll or HR.

Practical example (anonymized client case)

A client lived in New Jersey and worked in Pennsylvania. They were having Pennsylvania tax withheld from every paycheck. After confirming a reciprocal agreement applied, I helped the client complete the Pennsylvania nonresident withholding exemption and submit it to payroll. Withholdings stopped and the client avoided filing a Pennsylvania return to reclaim those wages, improving take-home pay immediately.

Note: examples are illustrative. Check your own state rules and keep documentation.

When reciprocity won’t prevent double filings

Reciprocity primarily addresses wage withholding, not every filing requirement. You may still be required to file a nonresident or part-year return in the work state to report non-wage income sourced to that state (commissions, rental income, business profits) or to reconcile withholding mistakes.

Telecommuting and hybrid work: newer complications

The rise of telecommuting has complicated reciprocity. Some states assert jurisdiction over wages for work performed within their borders (source rules) even if your employer is in another state. Others may permit exemptions when all work for the day is performed remotely in the resident state. The result: remote and hybrid workers should verify both (a) where their wages are sourced under state law, and (b) how payroll is reporting those wages.

Employer obligations and nexus concerns

Employers that hire remote workers or cross-border commuters need to understand payroll withholding responsibilities and possible nexus obligations (registration and withholding in additional states). If you are a payroll manager, see our internal guide on “State Income Tax Withholding for Remote Workers: Employer Obligations” for steps employers commonly take and registration triggers.

How to check and act — a practical checklist

  1. Verify reciprocity exists between your residence and work states on the relevant state revenue department websites.
  2. Ask your employer what state withholding is being applied now and request the reciprocal nonresident withholding certificate if a reciprocal agreement applies.
  3. Submit the certificate to payroll and confirm future paystubs show the change.
  4. Keep copies of the certificate and emails confirming payroll changes.
  5. At tax time, file your resident state return and any required nonresident returns to claim refunds for prior incorrect withholding.
  6. If you change jobs, move, or begin remote work, repeat the check — reciprocity status and withholding rules can change.

Common mistakes and how to avoid them

  • Assuming federal Form W-4 controls state withholding: it does not. Use the state withholding/reciprocity form.
  • Not checking multiple sources of income: reciprocity usually applies only to wages; business income, rental income, and capital gains may still be taxed by the work state.
  • Missing deadlines to claim refunds: if taxes were improperly withheld, file timely nonresident returns to recover withheld amounts.
  • Not watching telework rules: performance location can create unexpected tax liability.

Recordkeeping and documentation

Save a copy of any reciprocity certificate you give to payroll, the employer’s acknowledgment, paystubs showing withholding changes, and your state tax returns. If the work state later questions an exemption, these records support your position.

When to consult a professional

  • You have income from multiple states or multiple employers.
  • Your job has a mix of remote and in-office days in different states.
  • You’re an employer with cross-border employees and uncertain withholding obligations.

In my experience working with cross-border commuters, early documentation and clear communication with payroll prevent most problems. An hour of professional help to set up withholding correctly can avoid months of paperwork and cash-flow disruption.

Further resources and links

Authoritative external sources (examples)

  • IRS — general guidance on state tax questions and residency issues: https://www.irs.gov (search “state residency” or “state income tax”).
  • State revenue department websites — search your residence and work state for reciprocity and withholding forms (e.g., state-specific pages such as revenue.pa.gov).
  • Consumer Financial Protection Bureau — information about tax refunds and consumer rights related to state taxation: https://consumerfinance.gov

Professional disclaimer

This article is educational and summarizes common rules and best practices about state income tax reciprocity as of 2025; it is not personalized tax advice. State tax law changes frequently. For advice specific to your situation, consult a licensed tax professional or your state revenue department.

Last reviewed: 2025 — check state revenue department sites and the IRS for the latest guidance before acting.