State tax reciprocity: What it is and how it can affect your employees

If you have hired, or are thinking of hiring, employees who live in a state different than your worksite, you should be aware of the tax implications.

Many states have entered into tax reciprocity agreements with surrounding states, allowing employees to pay state tax for only the state that they live and not for the state in which they work.  For example, Michigan and Indiana have a reciprocal agreement so if your worksite is in Michigan and you hire an employee living in  Indiana, the new employee would pay only Indiana income tax.

If there is no reciprocal agreement between states, an employee would pay taxes for both the state they live and the one they work in.  For example, the state of New York has no state tax reciprocity, so an employee working in New York state and living in nearby New Jersey is responsible for paying taxes in both states.  We always encourage employees in this situation to consult a tax professional, as there are still many states without tax reciprocity agreements that offer tax credits with the employee’s year-end tax filing.

Employees responsible for incorrect tax deductions

Being aware of current reciprocity agreements as well as future changes is incredibly important as an employer.  Employees with taxes incorrectly deducted can be charged not only the taxes owed, but for fees and penalties as well.  This can lead an employee to have a negative experience within your company.  Conversely, having the knowledge base of state tax reciprocity can not only help in producing an accurate payroll, but also helps you to answer employee questions confidently and hire new employees with ease.

For easy reference, here is a chart with information sourced from the American Payroll Association detailing current state reciprocity agreements. If you would like more information or have any questions, give BCN Services a call at 1-800-891-9911.

 

State Reciprocity Grid (Updated November 16, 2016)
Worked-In State Reciprocal Lived in States
District of Columbia Any Other US state
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, Kentucky, Michigan

 

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Dani Austin, Payroll Supervisor