State Tax Reciprocity Agreements in the United States

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. For example, a person who lives in Arizona but works in California wouldn’t 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 are taxed. They don’t have to file non-resident tax returns in the 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 doesn't have a reciprocity agreement. Employees should, however, provide their employers with the appropriate tax forms to avoid state taxes being inappropriately withheld.

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

Bilateral agreements

Bilateral agreements are a mutual pact where both states agree on how to handle the income taxes of cross-border workers. That means residents from one state working in the other only need to pay income taxes to their home state.

So, because Pennsylvania and New Jersey have a bilateral agreement, residents of Pennsylvania who work in New Jersey only pay income taxes to Pennsylvania, and vice versa.

Most reciprocal tax agreements in the United States are bilateral agreements.

Unilateral agreements

Unilateral agreements are when only one state decides on how it treats the income its residents earn in other states. They don’t need the other states to agree.

For example, while the District of Columbia (Washington, D.C.) has bilateral agreements with other states, its generous policy for non-residents can be seen as embracing a unilateral approach. Other states, notably Indiana, offer reciprocity to any state that does the same for them.

At the end of the day, whether these agreements are bilateral or unilateral, their main purpose is to avoid double taxation.

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States with reciprocity agreements

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

States with no income taxes

Nine states don't have state taxes. Employees who work in those states but live in another state don't 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 that have no state income taxes are as follows:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming

What to do if your state doesn’t have tax reciprocity

Workers who work in states without reciprocity agreements don't have to pay all the taxes for both states. Federal law in the United States prohibits multiple states from charging state taxes on the same income.

However, people who work in states without reciprocity agreements need to do a bit of homework. First, you likely need to file two (or multiple) tax returns:

• One for the state where you work (non-resident)

• Another for where you live (resident)

Next, don’t let the prospect of double taxation get you down. Check if your home state offers credits for taxes paid elsewhere, and keep all related paperwork in order — it’s your ticket to claiming those credits.

If necessary, be prepared to pay estimated taxes to avoid any surprises at the year’s end. Always file your taxes on time to avoid penalties. Given the complexity of tax laws and their tendency to change, touching base with a tax professional is a smart move.

Lastly, staying informed about tax updates and organizing your tax documents streamlines the whole process, making tax time less of a headache.

What do companies need to know?

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 table above. 

Companies are required to withhold state taxes for each employee, so it’s important to withhold the right amount. This is also true for international employers of workers in the United States.

In addition, companies might have to register their business with both the employee’s work and home states. Keeping accurate records is a must in this scenario.

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 the company and the employee pay the right amounts.

If in doubt, don’t hesitate to seek advice from a local tax professional, such as Remote.

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