Tax Reciprocity and How It Works
Tax reciprocity is an agreement between two states allowing a W-2 employee who works in one state, but lives in another, to pay earned income taxes based on the tax rules and laws of their resident state. In general, employers withhold taxes based on the tax rules and laws in the state the employees work, defined in Toast Payroll by the work tax location. Reciprocity agreements, where available, are an exception in that it allows withholdings for the resident state.
Tax reciprocity aims to eliminate the need for an employee working in a state in which they are not a resident to file in both their resident and work state. Reciprocity agreements can help prevent double taxation on an employee's earned income and make it easier for an individual to file personal taxes. In states without tax reciprocity agreements, employees who work in one state but live in another may need to file nonresident state tax returns in their work state and regular tax returns in their resident state. Most resident states offer a tax credit to avoid paying double taxes.
Independent contractors are unaffected by tax reciprocity and its regulations.
Which States Are Involved in Tax Reciprocity
As of May 2023, 16 (resident) states and the District of Columbia all have agreements regarding tax reciprocity. State agreements might differ, so some employee's pay may be fully, partially, or not withheld in their resident state. See the states that participate in tax reciprocity below:
Work State
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Resident State
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California
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Arizona
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District of Columbia (DC)
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Maryland, Virginia
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Iowa
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Illinois
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Illinois
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Iowa, Kentucky, Michigan, Wisconsin
|
Indiana
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Arizona, Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
|
Kentucky
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Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
|
Maryland
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District of Columbia, Pennsylvania, Virginia, West Virginia
|
Michigan
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Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
|
Minnesota
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Michigan, North Dakota
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Montana
|
North Dakota
|
North Dakota
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Minnesota, Montana
|
New Jersey
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Pennsylvania
|
Ohio
|
Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
|
Oregon
|
Arizona
|
Pennsylvania
|
Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
|
Virginia
|
Arizona, District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
|
Wisconsin
|
Illinois, Indiana, Kentucky, Michigan
|
West Virginia
|
Kentucky, Maryland, Ohio, Pennsylvania, Virginia
|
Considerations for Toast Payroll Customers
If an employee does have a home address on their Toast Payroll out of the state from their work tax location, and reciprocity exists, Toast Payroll will assume to withhold taxes from the resident state according to the chart listed above. This means that the business will need a state withholding tax account with the resident state of that employee. If a tax account is not opened, Toast Payroll may not be able to file and/or pay the withheld taxes to the state. Learn more about tax registration and find links to register in Toast Payroll: Register for State Tax Accounts.
Locate employees who are part of a reciprocity agreement by using the reports below. Also, check your Missing Data page to view any state tax information that Toast Payroll is missing. If an employee is found to be part of a reciprocity agreement, you will only need to apply for a state withholding account (SIT) and not a state unemployment account (SUTA) in the employee's resident state.
Accurate business addresses and employee home addresses are critical to remaining compliant. For instance, if an employee's Toast Payroll profile incorrectly lists the state the employee lives in, they may fill out an incorrect Form W-4 and/or non-resident certificate and their income taxation will not be compliant with tax reciprocity or state taxation regulations.
Tax Reciprocity Reporting
To locate reciprocity reporting for your staff, the best report is the Consolidated Payroll Summary Report in the Standard Report Library. Navigate to Reports > Standard and search for this report. Select pay periods or a date range to review, then select Excel or PDF to download this information. Once downloaded, check the State Taxes section to locate any states in which income tax was withheld.
Also, you'll find more information in the Quarterly Employee Payroll Audit Report within the Standard Report Library, including work tax locations per employee, but this report contains lots of other information. If you run this report, include demographics and taxes before queuing the report.
Additional Resources
This content is for informational purposes and is not intended as legal, tax, HR, or other professional advice. Please contact an attorney or other professional for advice.