What is a State Tax Reciprocal Agreement?

Filing taxes can be tricky, but it can be even more so if your employee lives in one state but works in another. In this case, where should taxes be filed? Does your employee have to file in both states? The answer depends on if the two states have a reciprocal agreement.

A reciprocal agreement is an arrangement between two states that permits a worker to request an exemption from tax withholding in the state they work in, saving them from having to file multiple tax returns.

This is applicable if an employee lives in Virginia and works in Maryland, for example, because those two states have a reciprocal agreement. In this case, the employee can ask their employer to stop withholding taxes for Maryland (where they work). The employee would only have to file a Virginia tax return (where they live) come tax time. This can also be done if the employee lives in Maryland and works in Virginia. As long as the two states have a reciprocal agreement, it does not matter which state the employee lives in and where they work.

Any wages earned through employment including salaries, tips, commissions, hourly wages, and bonuses are included. State reciprocal agreements have no effect on federal payroll taxes, only state and local.

Not all states have reciprocal agreements – below is a list of states where this is applicable. States underlined and in bold represent where an employee lives, with states listed underneath where they would be able to work with a reciprocal agreement.

The easiest way to ensure compliance with paying household taxes is to use GTM Payroll Services. Contact us at (800) 929-9213 for more information.