Quick overview

State reciprocity agreements are state-to-state deals that prevent workers from being taxed twice on the same wage income when they live in one state and work in another. If a reciprocity agreement applies, you generally file a state-specific exemption or reciprocity form with your employer so that only your home state withholds income tax. This reduces needless withholding, simplifies returns, and avoids calls to payroll every year.

(Authoritative sources: check the IRS for state filing guidance and your state revenue department for current reciprocity rules: https://www.irs.gov and your state’s Department of Revenue.)

How reciprocity actually works

  • Reciprocity is bilateral. Two states agree that commuters who live in State A but work in State B will pay income tax only to State A.
  • To stop withholding by the work-state employer, the employee usually completes a state reciprocity or exemption certificate (not a federal W-4). Employers rely on that form to adjust payroll withholding.
  • If no reciprocity exists, you may still avoid double taxation by claiming a credit on your resident return for taxes paid to the nonresident state, or by filing a part-year/nonresident return as required by the work state.

Key point: reciprocity stops withholding at the payroll level; it does not change residency rules. You still file as a resident in your home state and as a nonresident or not at all in the work state depending on agreement rules.

Who is affected

  • Cross-border commuters who live in one state and report to an office in another.
  • Remote employees whose work location or employer presence triggers state withholding.
  • Seasonal or part‑year workers who split time across borders.

People who work entirely remotely from home generally owe tax only to their state of residence, but the presence of the employer, clients, or physical workplace can affect withholding rules. For telecommuters, see our related guidance on nuances and remedies: How State Withholding Nuances for Telecommuters: Reciprocity, Credits, and Remedies (https://finhelp.io/glossary/state-withholding-nuances-for-telecommuters-reciprocity-credits-and-remedies/).

Common examples and forms

States each handle reciprocity differently. Typical examples include Maryland–Virginia and Illinois–Iowa (historically). To claim exemption from the work-state withholding, employees generally complete a state form such as a reciprocity certificate or an exemption from withholding form. Examples often used in practice:

  • Maryland residents working in Virginia may submit Maryland’s Form MW507 (reciprocity) or the equivalent to their employer. Verify the current form on the Maryland Comptroller site.
  • Illinois residents working in neighboring states may use Illinois-specific withholding forms (e.g., IL-W-5 or similar) when reciprocity applies.
  • Indiana uses in-state withholding forms (WH-4 variants) for exemptions in some reciprocal relationships.

Always confirm the exact form name and number on the state revenue website before relying on it. State forms and numbers can change; your employer’s payroll or HR team should also confirm which document they accept.

Step-by-step: how to avoid double withholding

  1. Confirm whether the two states have a reciprocity agreement. Check your state’s Department of Revenue or the other state’s revenue website. FinHelp’s glossary includes an overview of reciprocity and examples: How State Reciprocity Agreements Affect Withholding for Cross-Border Workers (https://finhelp.io/glossary/how-state-reciprocity-agreements-affect-withholding-for-cross-border-workers/).

  2. If a reciprocity agreement applies, download and complete the correct reciprocity/exemption form for the work state or your home state (states differ). Provide the completed form to payroll or HR — not the federal W-4.

  3. Confirm payroll has applied the exemption. Ask Payroll to show the change on your paystub or in your employee portal. If withholding is still occurring, re-submit the form and escalate to HR.

  4. If you already had withholding taken in error during the year, you can:

  • Request a refund from the employer (payroll correction), or
  • Claim a credit or refund on your tax return — file a nonresident return in the work state or claim a resident credit for taxes paid to another state on your home-state return.
  1. If your residency changes during the year, file part‑year returns as required and update withholding forms immediately after your move.

When reciprocity won’t help

  • If you work in multiple states, reciprocity with one state doesn’t exempt you from withholding in another state.
  • Reciprocity generally applies only to wage income (salaries, hourly pay). It often does not cover business income, rental income, or income allocated to a business operating in the work state.
  • Some states limit reciprocity to residents of specific neighboring states—there is no nationwide system.

If reciprocity is unavailable, you may avoid double taxation in most cases by claiming a credit on your resident-state return for taxes paid to the work state (see your state instructions).

Employer responsibilities and practical payroll notes

  • Employers should follow the work-state rules for withholding unless they receive an approved reciprocity certificate or exemption signed by the employee.
  • Payroll teams must track state payroll registration, as employing across state lines can create withholding and unemployment tax obligations for the employer.
  • If you are an employer or payroll manager, use state revenue sites and payroll tax software that supports reciprocity rules to reduce errors.

(Employer resource: IRS guidance for employers and state revenue departments; also consult state tax bulletins for reciprocity specifics.)

Common mistakes and how to fix them

  • Not submitting the correct state reciprocity form to payroll. Fix: provide the correct form and request a payroll correction for prior withholding.
  • Assuming reciprocity applies to non-wage income. Fix: review state definitions of taxable income; file required nonresident returns where necessary.
  • Failing to update payroll after a move. Fix: update HR and review withholding before the first paycheck after a move.

Example scenarios (real-world style)

  • A Maryland resident working in Northern Virginia completes Maryland’s reciprocity certificate and stops Virginia withholding. The employee pays Maryland tax only and avoids refund/credit hassles.

  • An Illinois resident works part of the year in Indiana and part in Illinois. Reciprocity with Indiana reduces withholding there, but the employee must report total income to Illinois, claiming the correct credits where applicable.

In my practice helping cross‑border clients, the most common catch is failing to submit the form to payroll. That simple step alone corrects most over-withholding cases.

What to do if you already had taxes withheld by the work state

  • Contact payroll and ask for an employer payroll correction (best outcome — you get reflected refunds on a corrected payroll report).
  • If payroll won’t correct or time has passed, file a nonresident return or refund claim with the work state. Then claim a credit on your resident return for taxes effectively paid to that state.
  • Keep records: paystubs, completed reciprocity forms, and written communications with payroll. These will support refund and credit claims.

Where to confirm rules and forms

  • Your state Department of Revenue website is the primary source for reciprocity agreements and required forms. If you live in Maryland or work in Virginia, consult the Maryland Comptroller and Virginia Department of Taxation sites for the specific reciprocity certificate and the employer guidance.
  • For federal-level employer guidance, use the IRS employer publications: https://www.irs.gov.
  • For consumer-facing explanations of taxes and multistate concerns, Consumer Financial Protection Bureau articles and state tax guides are useful.

Checklist before starting a job across state lines

  • Verify whether your home state and work state have a reciprocity agreement.
  • Download and complete the correct reciprocity/exemption form and give it to payroll before your first paycheck.
  • Confirm payroll applied the exemption on your paystub.
  • If you move mid-year, update HR immediately and prepare for part‑year filing.
  • Keep copies of all forms and communications with payroll.

Additional reading

Disclaimer: This article is educational only and not individualized tax advice. State tax rules and reciprocity agreements change; verify forms and procedures with the relevant state Department of Revenue or a qualified tax professional before acting. For federal guidance and employer resources, see the IRS website (https://www.irs.gov).