Reciprocal agreement
Summary Definition: An arrangement between two or more states that only requires employees who work in one state but live in the other to pay income taxes to the state in which they live.
What is a reciprocal agreement?
A reciprocal agreement is an arrangement between two or more states that allows residents of one state to work in another state without having to pay state income taxes (SITs) to both.
Under these agreements, employees only pay income taxes and file a tax return in their home state (i.e., the state where they live). In their work state, they’re exempt from paying income taxes or filing a tax return, but need to file an exemption form with that work state first.
Key takeaways
- A reciprocal agreement is an arrangement between two or more states that prevents an employee working in one state while living in another from having to pay income taxes to both states.
- Under a reciprocal agreement, employees only pay income taxes to their home state (i.e., the state where they live) and are exempt from income taxes in their work state.
- Without a reciprocal agreement, an employee pays income tax to their work state but must file a tax return in both states, and may owe extra taxes or receive a refund if the two states have different income tax rates.
Importance of state reciprocity
Without a reciprocal agreement in place, employees pay income taxes to their work state but still have to file a tax return in their home state. If the home state has a higher income tax rate than the work state, the employee will owe additional taxes to make up the difference. Conversely, if the home state has a lower income tax rate, the employee should receive a refund.
According to the U.S. Supreme Court’s 2015 decision in Comptroller of the Treasury of Maryland v. Brian Wynne, it's both illegal and unconstitutional for two states to impose income taxes on the same income.
The court’s decision held that such double taxation violates the U.S. Constitution’s Commerce Clause by imposing an improper burden on interstate commerce.
Despite this ruling, if two states don’t have a reciprocal agreement, it can still create challenges at tax time for employees who live in one state but work in another. This is especially true if the two states have different income tax rates.
What states have reciprocity?
States with reciprocal agreements usually have a corresponding exemption form for employees to submit, granting them tax-exempt status for state income taxes in their work state.
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Work state |
Home state |
Exemption form |
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Arizona |
California, Indiana, Oregon, Virginia |
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D.C. |
Maryland, Virginia |
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Illinois |
Iowa, Kentucky, Michigan, Wisconsin |
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Indiana |
Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
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Iowa |
Illinois |
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Kentucky |
Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin |
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Maryland |
D.C., Pennsylvania, Virginia, West Virginia |
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Michigan |
Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin* |
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Minnesota |
Michigan, North Dakota |
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Montana |
North Dakota |
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New Jersey |
Pennsylvania |
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North Dakota |
Minnesota, Montana |
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Ohio |
Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
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Pennsylvania |
Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
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Virginia |
D.C., Kentucky, Maryland, Pennsylvania, West Virginia |
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West Virginia |
Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
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Wisconsin |
Illinois, Indiana, Kentucky, Michigan |
*Employers may create a custom exemption form or use the line on MI-W4 for claiming exemption from withholding. Employees should write "Reciprocal Agreement" and the state name on that line.
For more help navigating state payroll tax variations, check out our federal and state payroll tax guide.
Types of reciprocal agreements
States with reciprocal agreements usually have a corresponding exemption form for employees to submit, granting them tax-exempt status for state income taxes in their work state.
While the logic behind them remains the same, there are two different types of reciprocal agreements states can use:
- Bilateral agreements: Agreements between two states in which both agree to provide tax exemptions or credits to residents of the other state. The majority of reciprocal agreements currently in effect are bilateral, though the details of each vary based on the states involved.
- Unilateral agreements: Indiana, Minnesota, and Wisconsin have standing offers of reciprocity with any state that provides similar tax treatment to its residents. For example, if Illinois wanted to enter into a reciprocity agreement with Indiana, it would only need to adopt a law providing tax relief for Indiana residents working in Illinois that is similar to the relief Illinois residents working in Indiana receive.
Non-tax reciprocal agreements
While most discussions of reciprocal agreements focus on state income taxes, reciprocity exists in many other areas as well. These arrangements allow organizations, governments, or professionals to mutually share benefits, resources, or recognition.
- Professional licensing: Many professions, such as nursing or teaching, are recognized across states or regions, allowing licensed individuals to work elsewhere without having to repeat exams or certifications.
- Disaster recovery: Businesses sometimes enter into mutual aid agreements to provide backup facilities, equipment, or support to each other during emergencies.
- Government information or service sharing: Agencies or governments may agree to share data, technology, or services, ensuring both parties benefit without duplicating resources.
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