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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 perform 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.

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.

In addition, certain employers that send employees to work in other states for a short time period (e.g., nonresident short-term-service employees, disaster or emergency response employees, transportation and movie production employees) need to know whether they must withhold income tax for those other states for the work their employees perform there. Many states provide a withholding exemption for such nonresident employees (and some require or request that the out-of-state employer provide the state tax agency with information verifying its employees' activities in that state).

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 withholding risks and penalties by summarizing each state's reciprocal income tax withholding agreements and/or other nonresident income tax exemptions.

For purposes of this chart, an indication of N/A means that a state either does not have an income tax, or a reciprocal agreement with any other state and/or any exemptions for nonresident employees working in the state. 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 military employees and nonresident military spouses;
  • An explanation of income tax nexus (i.e., the establishment of a presence in a state for tax purposes);
  • Step-by-step guidance on how to determine which states' income tax to withhold from the pay of nonresident employees who go into an employer's state to work and nonresident employees who work for an employer remotely (e.g., from home);
  • Step-by-step guidance on how to determine which jurisdictions' income taxes to withhold from the pay of employees who perform work for an employer in more than one state;
  • A checklist to determine state income tax nexus for telecommuters; and
  • Links to each state's tax agency where an employer may register as a tax entity/withholding agent.