A state reciprocity agreement is a deal between two states that lets employees who live in one state but work in another only pay income tax in their home state. Without one, workers could owe taxes in both states.
These agreements simplify withholding for both employees and employers.
Which states have reciprocity agreements?
As of 2025, 16 states and Washington D.C. have reciprocity agreements in place. Not every state pairs with every other, so the agreement only applies to specific state combinations.
States with active reciprocity agreements include:
Arizona, Illinois, Indiana, Iowa, Kentucky, Maryland
Michigan, Minnesota, Montana, New Jersey, North Dakota
Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin
Always check whether a specific state pair has an active agreement before making any withholding changes.
How does a state reciprocity agreement affect payroll?
When a reciprocity agreement applies, employers withhold income tax only for the employee's home state, not the work state.
Here is how it generally plays out:
Scenario | Withholding result |
Employee lives and works in the same state | Withhold for that state as normal |
Employee lives in State A, works in State B (reciprocity exists) | Withhold only for State A |
Employee lives in State A, works in State B (no reciprocity) | May need to withhold for both states |
Payroll teams need to confirm the agreement exists and have the employee's exemption form on file before adjusting withholding.
How does an employee claim a reciprocity exemption?
The employee submits a state-specific exemption form to their employer. Each state has its own version of this form.
Once the employer receives it, they stop withholding for the work state and begin withholding for the home state. If the employee does not submit the form, the employer withholds for the work state by default.
What happens if a state does not have a reciprocity agreement?
The employee may owe taxes in both states. Most states offer a tax credit for taxes paid to another state, which reduces or eliminates double taxation, but it does not remove the obligation to file in both states.
In that case, employees typically need to file a resident return in their home state and a nonresident return in the state where they work.
Key Takeaways
Summary | |
Definition | An agreement between two states allowing residents to pay income tax only in their home state |
Who benefits | Employees who live in one state and work in another |
Payroll impact | Employer withholds only for the employee's home state |
Employee action required | Must submit a state exemption form to the employer |
If no agreement exists | Employee may need to file returns in both states |
Frequently Asked Questions
Does a reciprocity agreement apply automatically?
No. The employee must submit the correct exemption form to their employer to activate it. Without the form, the employer withholds for the work state.
What if an employee works in multiple states?
Reciprocity only applies to the specific states covered by an agreement. If an employee works in three states, only the state pairs with active agreements benefit from the exemption.
Can reciprocity agreements change or end?
Yes. States can terminate existing agreements. Employers should monitor state tax updates, especially when employees regularly commute across state lines.
Do remote workers qualify for reciprocity agreements?
It depends on the state. Some states apply reciprocity to remote workers, others do not. Employers should verify the rules for each specific state pair.
