Background

State reciprocity agreements are bilateral arrangements between two states (or a state and the District of Columbia) that stop the work state from taxing wages earned by residents of the other state. These agreements became common as commuter patterns increased and states sought to reduce double taxation and streamline withholding for cross-border workers (NCSL — ncsl.org).

How it works

  • Payroll withholding: If your residence state has reciprocity with your employer’s state, your employer generally should withhold state income tax for your state of residence only. That typically requires you to complete the work state’s exemption or nonresident form and give it to payroll.
  • Filing: You normally file a tax return only in your resident state for wage income. Some workers still must file a nonresident return in the work state to report other income or to request a refund of withheld tax.

Real-world example

A Maryland resident who commutes into Virginia under a reciprocity agreement pays Maryland income tax on wages, not Virginia. In my practice I’ve seen clients who avoided filing two wage-based state returns after submitting the correct payroll exemption to their employer — saving time and avoiding refunds delays.

Who is affected and when to check

  • Commuters who live in one state and work in another with a shared border or metro area.
  • Remote workers whose employer sits in a different state (some states treat remote work differently; check state rules).

Check whether your two states have reciprocity before assuming you’re exempt from the work-state tax. For residency rules and remote-worker scenarios, see our guide on Filing State Taxes for Remote Workers: Residency Rules (https://finhelp.io/glossary/filing-state-taxes-for-remote-workers-residency-rules/).

Common mistakes and misconceptions

  • Assuming reciprocity is nationwide: Only certain state pairs have agreements; many do not.
  • Forgetting to submit the employer form: If you don’t file the correct nonresident/exemption form with payroll, your employer may withhold the work-state tax.
  • Ignoring other income: Reciprocity typically covers wage income only; you may still owe tax to the work state on business, rental, or other source income.

Professional tips and practical steps

  1. Verify the agreement: Confirm current reciprocity pairs on your state revenue site or the National Conference of State Legislatures (NCSL) list (ncsl.org).
  2. Submit the correct payroll form: Complete the work-state’s exemption/nonresident certificate as soon as you start the job to stop incorrect withholding.
  3. Track address and days worked: Keep proof of residence and records of where you performed services if the state requests substantiation.
  4. Review year-end withholding: If incorrect taxes were withheld, request a refund from the work state and adjust withholdings for the next year. See our guides on Filing Taxes for Multiple States: Forms You Need (https://finhelp.io/glossary/filing-taxes-for-multiple-states-forms-you-need/) and How to Calculate and Pay Estimated State Taxes for Multistate Earners (https://finhelp.io/glossary/how-to-calculate-and-pay-estimated-state-taxes-for-multistate-earners/) for filing and estimated-payment details.

If you paid both states in error

If your employer withheld work-state tax despite reciprocity, you can generally:

  • Request a refund from the work state by filing the appropriate nonresident return; and/or
  • Ask your employer to adjust withholding and correct payroll records to avoid repeated withholding.

When reciprocity doesn’t help

Reciprocity usually covers wage withholding only. If you have other income sourced to the work state (self-employment, rental income, capital gains tied to property), you may still owe tax there. Also, not all states participate in reciprocity — some states simply tax all nonresidents on income earned in-state.

FAQs (short)

Q: Do I ever need to file in the work state?
A: Yes — if you had tax withheld there, have other in-state-sourced income, or want a refund of withheld tax. Rules vary by state.

Q: How do I stop double taxation?
A: Submit the correct exemption form to payroll and, if needed, claim a credit on your resident-state return for taxes paid to another state (when reciprocity does not apply).

Authoritative sources

Professional note and disclaimer

In my experience as a financial services professional, the most common cause of trouble is failure to file the employer exemption form promptly. This article is educational and not individualized tax advice; consult a licensed tax professional or state revenue department for guidance specific to your situation.