State Tax Reciprocity Agreements: The Complete 2026 Guide
State Tax Reciprocity Agreements: The Complete 2026 Guide
If your employees live in one state but work in another, you need to know about state tax reciprocity agreements. These agreements determine which state's taxes you withhold from employee paychecks—and getting it wrong can create compliance headaches for your business and tax problems for your employees.
This guide covers everything employers need to know: what reciprocity agreements are, which states have them, the exemption forms required, and what to do when no agreement exists.
What Is a State Tax Reciprocity Agreement?
A state tax reciprocity agreement is an arrangement between two states that allows employees who live in one state and work in another to pay income tax only to their home state. Without these agreements, employees would face the hassle of filing tax returns in both states and potentially being taxed twice on the same income.
For employers, reciprocity simplifies payroll. When an agreement exists, you only withhold state income tax for the employee's state of residence—not the state where they physically work.
Example: Sarah lives in New Jersey but commutes to Pennsylvania for work. Because New Jersey and Pennsylvania have a reciprocity agreement, her employer withholds New Jersey state taxes from her paycheck. Sarah only files one state tax return (New Jersey), and her employer only manages withholding for one state.
Which States Have Reciprocity Agreements in 2026?
Currently, 16 states plus the District of Columbia participate in reciprocity agreements. There are 30 total agreements across these jurisdictions.
Complete Reciprocity Agreement Matrix
| State | Has Agreements With |
|---|---|
| Arizona | California, Indiana, Oregon, Virginia |
| District of Columbia | Maryland, Virginia (exempts all nonresidents) |
| Illinois | Iowa, Kentucky, Michigan, Wisconsin |
| Indiana | Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
| Iowa | Illinois |
| Kentucky | Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin |
| Maryland | District of Columbia, Pennsylvania, Virginia, West Virginia |
| Michigan | Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin |
| Minnesota | Michigan, North Dakota |
| Montana | North Dakota |
| New Jersey | Pennsylvania |
| North Dakota | Minnesota, Montana |
| Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
| Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
| Virginia | District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia |
| West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
| Wisconsin | Illinois, Indiana, Kentucky, Michigan |
States with the most agreements:
- Kentucky: 7 agreements
- Michigan: 6 agreements
- Pennsylvania: 6 agreements
States with only one agreement:
- Iowa (Illinois only)
- Montana (North Dakota only)
- New Jersey (Pennsylvania only)
Required Exemption Forms by State
For reciprocity to apply, employees must submit an exemption form to their employer. Without this form on file, you must withhold taxes for the work state.
| Work State | Resident States Covered | Exemption Form |
|---|---|---|
| Arizona | CA, IN, OR, VA | Form WEC |
| District of Columbia | All nonresidents | Form D-4A |
| Illinois | IA, KY, MI, WI | Form IL-W-5-NR |
| Indiana | KY, MI, OH, PA, WI | Form WH-47 |
| Iowa | IL | Form 44-016 |
| Kentucky | IL, IN, MI, OH, VA, WV, WI | Form 42A809 |
| Maryland | DC, PA, VA, WV | Form MW-507 |
| Michigan | IL, IN, KY, MN, OH, WI | Form MI-W4 |
| Minnesota | MI, ND | Form MWR |
| Montana | ND | Form MW-4 |
| New Jersey | PA | Form NJ-165 |
| North Dakota | MN, MT | Form NDW-R |
| Ohio | IN, KY, MI, PA, WV | Form IT-4NR |
| Pennsylvania | IN, MD, NJ, OH, VA, WV | Form REV-419 |
| Virginia | DC, KY, MD, PA, WV | Form VA-4 |
| West Virginia | KY, MD, OH, PA, VA | Form WV/IT-104 |
| Wisconsin | IL, IN, KY, MI | Form W-220 |
How Reciprocity Works for Employers
When a Reciprocity Agreement Exists
- Employee submits exemption form - The employee provides you with their state's exemption form certifying they live in a reciprocal state
- You withhold home state taxes - Stop withholding taxes for your business's state and start withholding for the employee's home state
- Employee files one return - The employee only files a tax return in their home state
When No Reciprocity Agreement Exists
If your employee lives in a state without a reciprocity agreement with your business's state:
- You withhold work state taxes - Withhold taxes for the state where your business is located
- Employee files two returns - The employee files a resident return in their home state and a nonresident return in the work state
- Tax credit applies - Federal law prohibits double taxation, so the employee's home state provides a credit for taxes paid to the work state
Example: Maria lives in New Mexico but works in Colorado. There's no reciprocity agreement between these states, so her employer withholds Colorado taxes. Maria files two state returns—a nonresident return in Colorado and a resident return in New Mexico, where she claims a credit for the Colorado taxes paid.
States Without Income Tax
Nine states have no state income tax, which simplifies things considerably:
- Alaska
- Florida
- Nevada
- New Hampshire (no tax on wages)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
If your employee lives in one of these states and works in a state with income tax, you withhold taxes for the work state. If your business is in one of these states and your employee lives in a state with income tax, you may need to register for withholding in their home state.
Important Considerations for Employers
Reciprocity Applies Only to Wages
These agreements cover wages, salaries, and compensation income. They typically don't cover:
- Self-employment income
- Business income
- Rental income
- Investment income
Local Taxes May Still Apply
Reciprocity agreements cover state income taxes only. Some cities and localities impose their own wage taxes regardless of reciprocity status. Research local requirements for both your business location and your employees' residence.
Remote and Hybrid Work Complications
With more employees working remotely or on hybrid schedules, reciprocity becomes more valuable—but also more complex. An employee who works from home in one state three days a week and commutes to an office in another state two days a week may have different withholding requirements. Reciprocity agreements eliminate this complexity by taxing based solely on residence.
Agreements Can Change
Reciprocity agreements are entered into by state revenue departments and can be modified or terminated. Most notably, Minnesota and Wisconsin had a reciprocity agreement until 2009, when Minnesota ended it due to payment disputes. Wisconsin legislators are currently studying whether to reinstate the agreement.
What Employers Should Do
- Know your employees' residences - Track where employees actually live, not just where they work
- Collect exemption forms during onboarding - Add reciprocity forms to your new hire checklist for employees living in reciprocal states
- Update forms when employees move - A change in residence may trigger different withholding requirements
- Register in multiple states if needed - You may need to register for withholding in states where your employees live
- Document everything - Keep copies of all exemption forms in case of audit
The Bottom Line
State tax reciprocity agreements exist to simplify taxation for cross-border workers. For employers with employees living in one state and working in another, understanding these agreements is essential for accurate payroll withholding.
Check the tables above to see if your state has agreements with neighboring states, collect the appropriate exemption forms from eligible employees, and adjust your withholding accordingly. When no reciprocity exists, withhold for your business's state and ensure employees understand they'll need to file returns in both states.
This information is current as of January 2026. State tax laws and agreements can change. For specific guidance on your situation, consult a tax professional or your state's department of revenue.
Related Resources: