State Payroll Tax Reciprocal Agreements: What You Need to Know

As an employer, navigating state payroll taxes can be a complex process. And, if your business operates in multiple states, it can become even more challenging. Fortunately, many states have entered into reciprocal agreements that simplify payroll tax obligations.

What is a Reciprocal Agreement?

A reciprocal agreement between two states means that employees who work in one state but live in another are not subject to double taxation. Instead, they only pay payroll taxes in the state where they reside.

For example, if an employee lives in New Jersey but works in Pennsylvania, they would only pay Pennsylvania payroll taxes on their income. The reciprocal agreement between the two states ensures that the employee is not taxed twice on the same income.

Which States Have Reciprocal Agreements?

Currently, 17 states have reciprocal agreements:

– Arizona and California

– Connecticut and Indiana

– Delaware and Pennsylvania

– Illinois and Iowa

– Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia

– Michigan and Indiana

– Minnesota and North Dakota

– Montana and North Dakota

– New Jersey and Pennsylvania

– Ohio and Pennsylvania

– Oregon and Idaho

– Virginia and District of Columbia

– Wisconsin and Illinois

It is important to note that each reciprocal agreement is unique. Some agreements only apply to specific professions or industries, while others apply to all employees.

How Do Reciprocal Agreements Impact Employers?

Reciprocal agreements simplify payroll tax obligations for employers with employees who reside in different states. Employers no longer need to worry about withholding and remitting payroll taxes to multiple states. Instead, they only need to withhold and remit payroll taxes for the state where the employee resides.

However, employers must ensure that they are aware of the reciprocal agreements in place and accurately withhold and remit payroll taxes. Failure to do so can result in penalties and fines.

It is also important for employers to stay up-to-date on any changes to reciprocal agreements. States can enter into or terminate agreements at any time, which can impact payroll tax obligations.

Conclusion

Reciprocal agreements between states simplify payroll tax obligations for employers with employees who reside in different states. Currently, 17 states have reciprocal agreements in place. Employers must ensure that they accurately withhold and remit payroll taxes based on the reciprocal agreements in place to avoid penalties and fines. By staying up-to-date on any changes to reciprocal agreements, employers can ensure compliance and avoid any unnecessary complications.