Income Tax Withholding Reciprocal Agreements and Other Exemptions by State
Author: Alice Gilman
Employers that have employees who telecommute from a different state than the one in which the employer's business operations are located or nonresident employees who go into the employer's office to work must correctly determine whether to withhold income tax from the pay of such employees for the employer's state, the states from which the employees telecommute and/or live, or both. An employer that fails to properly withhold income taxes may be subject to costly noncompliance penalties and fines and may have to make time consuming payroll corrections.
The following chart helps employers avoid these risks by summarizing each state's reciprocal income tax withholding agreements and/or other nonresident income tax exemptions. When states are party to a reciprocal agreement, employees who live in and work in either of the two states are subject only to the income tax of their state of residence. However, employers are usually still required to withhold income tax from the pay of nonresident and telecommuting employees for their respective states of residence and register with and remit the withholdings to the tax agencies of those states. The chart also includes the names of and links to any forms that nonresident employees must complete and submit to their employer to verify their state of residence.
For purposes of this chart, an indication of N/A means that a state does not have a reciprocal agreement with any other state and/or an exemption for nonresident employees. In addition, the term Jurisdiction refers to the state(s) in which an employer has business operations.
The following additional information is available on XpertHR:
- Individual state laws and rules on personal income tax credits for employees who live and work in different states and withholding exemptions for nonresident military spouses;
- An explanation of income tax nexus (i.e., the establishment of a presence in a state for tax purposes); and
- A checklist to determine state income tax nexus for telecommuters.