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Payroll & Tax
Feb 19, 2020

What Is Tax Reciprocity and What Does It Mean for Your Small Business?

Lauren Burke

It’s here. Forms W-2 are in the hands of your employees. The IRS has started accepting and processing returns. That could only mean one thing: Tax season is officially underway!

It’s always a good time for a refresher on all things tax when it comes to running your business. Keep reading to learn the basics of tax reciprocity and what it means for your business.

What is tax reciprocity?

Do you have employees who live in one state but work in another? Perhaps you’re located in say, Pennsylvania (like us) but have an employee who lives in New Jersey. That employee could benefit from a tax reciprocity agreement between the two states.

This tax reciprocity agreement basically allows residents of one state to request exemption from tax withholding in the other state. Hence, it would eliminate the trouble of having to file multiple state tax returns.

Note that tax reciprocity applies to state taxes, not federal payroll taxes.

If you have employees who work in another state, this chart is for you.

Here’s a breakdown of states with reciprocal agreements and the forms an employee is required to fill out.

State name

States with reciprocal agreements

Required exemption form

Arizona

California, Indiana, Oregon and Virginia

Form WEC

Arkansas

City of Texarkana, TX

Form AR4EC(TX)

Washington DC

Any non-residents who work in DC

Form D-4A

Illinois

Iowa, Kentucky, Michigan and Wisconsin

Form IL-W-5-NR

Indiana

Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin

Form WH-47

Iowa

Illinois

Form 44-016

Kentucky

Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin and Virginia

Form 42A809

Maryland

Washington DC, Pennsylvania, Virginia and West Virginia

Form MW 507

Michigan

Illinois, Indiana, Kentucky, Minnesota and Ohio

Form MI-W4

Minnesota

Michigan, North Dakota

Form MWR

Montana

North Dakota

Form NR-2

New Jersey

Pennsylvania

Form NJ-165

North Dakota

Minnesota, Montana

Form NDW-R

Ohio

Indiana, Kentucky, Michigan, Pennsylvania and West Virginia

Form IT-4NR

Pennsylvania

Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia

Form REV-420

Virginia

Kentucky, Maryland, Washington DC, Pennsylvania and West Virginia

Form VA-4

West Virginia

Kentucky, Maryland, Ohio, Pennsylvania and Virginia

Form WV/IT-104

Wisconsin

Illinois, Indiana, Kentucky and Michigan

Form W-220

What does tax reciprocity mean for you as the employer?

These reciprocal agreements are really a benefit for your employees, as it saves them the hassle of filing and paying taxes of their home state in addition to requesting a refund from the state your company (where they work) is in.

However, as an employer, you may choose whether you want to withhold state income tax for the employee’s state of residence.

As always, it’s best to check with your trusted advisor when it comes to matters like this. Our information is simply educational.

If you’re a PrimePay client, we have forms in place that can handle this! Not a client? 

Schedule a call today

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