Out of State Employees and Reciprocal Agreements

What are reciprocal agreements and when do you need them?

States have their own withholding requirements (unlike federal withholding which is the same for employers across the board), including for employees who work and live in different states. Some states require reciprocal agreements for such employees.

What is a Reciprocal Agreement?
A reciprocal agreement is an arrangement that exists when two states agree that an employee can work in one of the two states (a neighboring state) while only paying income tax to their own home state.
For example, the state of Pennsylvania has reciprocal agreements with several surrounding states: Ohio, Virginia, West Virginia, Maryland, New Jersey and Indiana. If an employee lives in Pennsylvania and works in any of the states listed, they only have to pay income tax to Pennsylvania. They can also request that their employer withholds Pennsylvania income tax from their checks.
Some other states that have reciprocal agreements include:

Indiana
Iowa
Illinois
Kentucky
Ohio
Maryland
Minnesota
Michigan
Montana
Virginia
West Virginia
North Dakota
District of Columbia
Kentucky
Wisconsin

How to Approach Reciprocal Agreements
States have taken some steps to provide employees a way to avoid double taxation, but this process can be simplified by taking some steps.

Check with the state department of revenue to determine whether reciprocal agreements list in your state and any requirements that exist for you and the employee.

If there are requirements, inform your employee of any responsibilities they may have if they prefer to have state income tax withheld from their own state. They usually just need to fill out a form exempting them from withholding taxes in their state of employment (and they should give it to you). Then you need to send a copy to the revenue agency of the state in which the employee works.

If required, you will need to withhold state income tax for the state in which the employee lives and will need a state withholding tax form (completed by the employee). You will also be required to pay and report the withholding tax to the state in which the employee lives.

It is important to note that reciprocal agreements do not have any bearing on local income tax withholding. It is also important to note that you are not obligated to withhold state income tax for the employee’s state of residence and the employee can also choose to not have you withhold any tax for the state in which he lives.

For help or further clarification on reciprocal agreements, reach out to us!