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.
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