State Income Tax Reciprocity Agreements: What You Need to Know

Are you considering working or running a business in a state other than your home state? If so, you may be subject to state income tax in both states, which can be confusing and frustrating for taxpayers. However, some states have income tax reciprocity agreements in place to help alleviate this issue.

What is State Income Tax Reciprocity?

State income tax reciprocity is an agreement between two states that allows employees who live in one state but work in the other to only pay income tax in their home state. In other words, the employee does not have to file an income tax return in the state where they work.

Which States Have Reciprocity Agreements?

Currently, 17 states have income tax reciprocity agreements in place:

– Illinois

– Indiana

– Iowa

– Kentucky

– Maryland

– Michigan

– Minnesota

– Montana

– New Jersey

– North Dakota

– Ohio

– Pennsylvania

– Virginia

– West Virginia

– Wisconsin

– District of Columbia

– Arizona (only with California)

What Does This Mean for Employers and Employees?

If you are an employee who works in a state with an income tax reciprocity agreement, you will only need to pay income taxes in your home state, regardless of where you work. However, you will still need to file a tax return in the state where you work to report your income, but you can claim a credit for the taxes paid to your home state.

For employers, this means they must withhold taxes for their employees’ home state instead of the state where they work. Employers must also keep track of the income earned by each employee in both states, as well as the taxes paid to each state.

It is important for both employees and employers to understand the rules and requirements of each state’s income tax reciprocity agreement to avoid penalties or fines.

What if My State Does Not Have a Reciprocity Agreement?

If your state does not have an income tax reciprocity agreement with the state where you work, you will be subject to income tax in both states. However, you may still be able to claim a credit for the taxes paid to the state where you work to avoid double taxation.

Conclusion

State income tax reciprocity agreements can be a helpful tool for employees and employers who work in multiple states. However, it is important to understand the rules and requirements of each state’s agreement to avoid any potential issues. If you are unsure about how to handle your taxes in a multi-state work situation, consult with a tax professional.