Minnesota Revises Guidelines for Income Tax Withholding Under Michigan, North Dakota Reciprocity Agreements

Author: Rena Pirsos, Brightmine Legal Editor

December 17, 2013

The Minnesota Department of Revenue (DOR) has revised its Withholding Fact Sheet 20, which explains the state's law regarding exemption from employee income tax withholding under reciprocity agreements that are in effect with Michigan and North Dakota. Employers in Minnesota, Michigan and North Dakota should review their withholding procedures to ensure compliance.

In general, an employee who does not work in the same state in which he or she resides may be subject to income tax withholding in both his or her state of residence and his or her state of employment. Reciprocity agreements between states prevent the earnings of such employees from being taxed by both states. Usually, only the tax of the state of residence is required to be withheld.

Reciprocity Exemption

An employee must meet two requirements for the year to qualify for the Minnesota reciprocity exemption:

  • The employee must be a Michigan or North Dakota resident working in Minnesota, or a Minnesota resident working in Michigan or North Dakota, and the employee must return to his or her state of residence at least once a month; and
  • The employee must have received income for work performed in a reciprocity state.

Withholding for Minnesota

A Minnesota employer is required to withhold federal income tax from the wages of an employee who resides in Michigan or North Dakota and, in most cases, Minnesota income tax must also be withheld. An employee who does not want Minnesota income tax to be withheld must provide the employer with a completed Form MWR, Reciprocity Exemption/Affidavit of Residency, by February 28 of each year, or within 30 days after beginning work for the employer or changing his or her permanent residence. The employee must submit a new form to the employer every year to continue the exemption.

Minnesota employers must submit copies of Forms MWR to the DOR by March 31, or within 30 days after receiving the form from the employee. An employer is subject to a $50 penalty for each Form MWR that it fails to send to the DOR as required.

On the other hand, an employer located in Michigan or North Dakota is not required to withhold Minnesota tax from an employee residing in Minnesota, but the employer may choose to do so for the employee's convenience.

Withholding Tax for Employee's Home State

A Minnesota employer with an employee who resides in Michigan or North Dakota is not required to withhold income tax from the employee's earnings for either of those two states, but may wish to do so for the employee's convenience.

An employer located in Michigan or North Dakota that chooses to withhold Minnesota income tax from the earnings of an employee who resides in Minnesota must register for a Minnesota tax ID number if it does not already have one for other taxes for the same business.

Information Reporting

Minnesota employers should always report on their Minnesota withholding tax return wages paid to an employee who has provided a completed Form MWR, even if the employer withholds tax for the reciprocity state. However, an employer should not report tax withheld for the other state on its Minnesota return.

If a Minnesota employer withholds for both Minnesota and a reciprocity state, it must report the Minnesota tax withheld on its Minnesota withholding return and report the amount withheld for the reciprocity state on that state's return.

Form W-2 Reporting

An employer that did not withhold tax for Minnesota or the employee's state of residence must complete the employee's Form W-2 by entering:

  • In box 15 (State), the employee's state of residence;
  • In box 16 (State wages, tips, etc.), the employee's wages; and
  • In box 17 (State tax), zero.

An employer that withheld tax for an employee's state of residence must complete the employee's Form W-2 by entering:

  • In box 15 (State), the employee's state of residence;
  • In box 16 (State wages, tips, etc.), the employee's wages; and
  • In box 17 (State tax), the total tax withheld for the year for the state of residence.

An employer that received a valid Form MWR from an employee is not required to send a copy of Form W-2 to the Minnesota DOR even though it is required to send a copy of the Form MWR to the DOR. However, an employer may be required to send a copy of an employee's Form W-2 to the employee's state of residence. Employers should keep a copy of employees' Forms W-2 with their tax records.