In the United States, federal taxes apply to workers no matter where they live. State taxes, however, can vary — especially for workers who live and work in different states. This guide provides information on how state tax reciprocity agreements work and which states currently have agreements in place.

What is a state tax reciprocity agreement?

For states with reciprocity agreements, workers only pay taxes in the state where they live, not the state where they perform the work. As an example, a person who lives in Arizona but works in California would not have to pay state taxes in California, because the two states have a tax reciprocity agreement.

Employees only have to file a tax return in the state where they will be taxed. They do not have to file nonresident tax returns in states where they work, even to mark their income as exempt. The only time an employee is required to file a state income tax return in another state is when that state does not have a reciprocity agreement. Employees should, however, provide their employers with the appropriate tax form to avoid state taxes being inappropriately withheld.

For employers, state tax reciprocity agreements make withholding simple. The company only needs to withhold state and local taxes in the state where the employee lives.

Workers who work in states without reciprocity agreements do not have to pay all the taxes for both states. Federal law in the United States prohibits multiple states from charging state tax on the same income. However, people who work in states without reciprocity agreements are required to file state income tax returns in both (or multiple) states.

The following states have state tax reciprocity agreements with at least one other state:

Arizona has state tax reciprocity agreements with California, Indiana, Oregon, and Virginia.

Illinois has state tax reciprocity agreements with Iowa, Kentucky, Michigan, and Wisconsin.

Indiana has state tax reciprocity agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin.

Iowa has a state tax reciprocity agreement with one state: Illinois.

Kentucky has state tax reciprocity agreements with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin. However, Virginia and Ohio’s agreements are conditional. Virginia residents are only eligible for the reciprocity agreement if they commute to Kentucky for all regular workdays. Ohio residents only qualify if they do not own 20% or more equity in an S corporation.

Maryland has state tax reciprocity agreements with Pennsylvania, Virginia, West Virginia, and Washington, D.C.

Michigan has state tax reciprocity agreements with Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin.

Minnesota has state tax reciprocity agreements with Michigan and North Dakota.

Montana has a state tax reciprocity agreement with one state: North Dakota.

New Jersey has a state tax reciprocity agreement with one state: Pennsylvania.

North Dakota has state tax reciprocity agreements with Minnesota and Montana.

Ohio has state tax reciprocity agreements with Indiana, Kentucky, Michigan, Maryland, Pennsylvania, and West Virginia.

Pennsylvania has state tax reciprocity agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia.

Virginia has state tax reciprocity agreements with Kentucky, Maryland, Pennsylvania, Washington, D.C., and West Virginia.

Washington, D.C. has state tax reciprocity agreements with Maryland and Virginia.

West Virginia has state tax reciprocity agreements with Kentucky, Maryland, Ohio, Pennsylvania, and Virginia.

Wisconsin has state tax reciprocity agreements with Illinois, Indiana, Kentucky, and Michigan.

Nine states do not have state taxes. Employees who work in those states but live in another state do not need to file any documentation for working outside their home state, but they do need to file and pay state taxes in the state where they live. The states with no state income taxes are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Companies with employees who work in states with reciprocity agreements should make sure their employees submit the proper form for their state, as provided in the last section. Companies are required to withhold state taxes for each employee, so it’s important to to withhold the right amount. This is also true for international employers of workers in the United States.

States without reciprocity agreements may still have options for employers and their workers, including income tax credits. Be sure to evaluate your tax situation carefully to ensure both company and employee pay the right amount.

State Tax Reciprocity Agreements in the United States

[Webinar Recording] Relocation for International Employees

How do you legally employ workers when they move from one country to another?

Three of Remote’s top experts in global employment have shared their wisdom in a one-hour online event. In this seminar, you will learn about:

Travel, short-term relocation, and long-term relocation

How employee actions affect companies unintentionally

Gaps in employment law for remote workers

In addition, this recording includes an extensive Q&A session highlighting more issues companies should consider as employees relocate.

If you have specific questions about relocation for your team, we are always happy to help. Fill out the form on this page or send us an email at hello@remote.com to get started.

On-demand video now available! In this one-hour online event, three of Remote's top global employment experts share their knowledge on relocation for international employees.

As an industry leader in global employment and payroll, we’re excited to share details on a few recent updates to the Remote platform that give you even more flexibility in how you pay employees for extras beyond their salary. 

We know salary is only one piece of the payroll puzzle for most companies. That’s why earlier this year, we rolled out two new capabilities — Expenses and Incentives — that empower our customers to use Remote as a one-stop-shop for all their employee payments, from salary deposits to expense reimbursements to special incentive payouts.

Whether your HR team is one person wearing many hats or a robust center of excellence with multiple divisions, the payroll process can get challenging quickly. Often, we hear that our customers have used multiple platforms for different types of remittances to cobble payments together manually. Yikes!

With our new expense and incentive features, Remote streamlines every aspect of the payroll process. No more logins to multiple accounts. No more complicated spreadsheets. You can easily approve expenses and pay out bonuses, commissions, and more in seconds.

In a nutshell, we’ve integrated the ability to reimburse expenses and pay commissions, bonuses, stipends, allowances, and other one-time payments outside of salary, right into our payroll platform.

You log into Remote. From the expenses area, you can review, approve, deny, or check the status of reimbursement invoices submitted by employees.

From the incentives area, you can pay out custom bonuses, commissions, allowances, and stipends with just a few clicks.

It’s that easy! And of course, you can also manage your regular payroll, approve time off requests, and pay contractors without leaving your browser.

Frequently asked questions about benefits and expenses

We know getting payroll right is top of mind for our customers, so we take enhancements to Remote’s platform seriously.

Can you schedule incentive payments for the future?

Yep. When adding an incentive payment in Remote, you just have to specify the payroll month to apply the payment. You can choose to pay the employee as soon as possible or schedule the payment for a later paycheck. However, all expenses and incentive payments must be submitted by the 10th of the month in order to be paid to employees during that month.

Can you pay employees in their local currency?

We’re one step ahead of you. Remote is set up to automatically detect the employee’s local currency, so you will see that currency reflected when submitting the incentive form. 

Can you see past payments made to employees?

Absolutely! You can quickly track your payment status, view scheduled payments, and review past payments made to employees any time in the Remote platform.

Salaries are obviously critical, but a paycheck is just one reason your employees stay with your company. Team culture, advancement opportunities, and perks are also big motivators.

Luckily, you don’t have to settle on a one-size-fits all plan to give your team the extras they want. With Remote, you can pay employees for bonuses, commissions, allowances, and stipends, as well as make one-time payments to employees for things like office supplies, ergonomic chairs, unused time off reimbursements, referral rewards, and any other incentives unique to your organization.

Say you want to give your software developer in Florida a monthly flip-flop fund or your sales rep in Colorado a monthly beanie bankroll. You can set up both by selecting the “Other” category under the incentives payment and adding the notes to the form. Customizations like these provide flexibility so you can quickly and easily apply the perks that best meet the needs of your individual employees.

These new releases build on important product enhancements fueled by direct customer feedback to help us simplify the global HR process. But we’re not done yet! Stay tuned as we continue to automate away the complexities of payroll, compliance, and benefits workflows for your business.

[Webinar Recording] Relocation for International Employees

Types of relocation

Immigration laws

International taxation

Employment regulations

You may also like

What’s new at Remote so far in 2021?

Announcing our long-term commitment to social purpose organizations

Everything you need to know about employee benefits in Germany

8 experts discuss mental health tips for remote teams