Understanding State Tax Reciprocity Agreements: A Comprehensive Guide

After the COVID-19 pandemic, the number of people working from home has increased drastically. Some have even relocated to a completely different state to work remotely. 

According to recent data, the percentage of those who primarily worked from home tripled from 5.7% to 17.9%. 

The rise of this hybrid work environment has proved advantageous for both employers and employees. But it has also brought forth a few business challenges, especially in tax filing operations. 

When hiring someone who lives in one state but works in another, they may be liable for taxes in both states. Tax credits from their home state can eliminate this double taxation, and state tax reciprocity agreements can further simplify the process. 

Here, we will discuss all the details of a state authorization reciprocity agreement, including its importance, the names of the reciprocity states, how to file state taxes for two states, and so on.

What is a State Tax Reciprocity Agreement?

State tax reciprocity agreements can be described as pacts between two states. Under these agreements, residents of one state can request an exemption from tax withholding in the other (reciprocal) state. 

This allows employers and employees to save time and effort that would otherwise be spent filing multiple state returns. 

Say you are hiring an employee who lives in Pennsylvania and works in New Jersey. These are two reciprocity states. This means the employee can request their employer (you) to stop withholding New Jersey taxes. They, then, only have to file a Pennsylvania tax return.

As of 2025, there are as many as 30 reciprocal agreements across 16 states and the District of Columbia.

How reciprocity works for employees

A state tax reciprocity agreement holds various benefits for an employee. Some of the most common ones include,

• Simplified tax filing: Without reciprocal agreements, employees can enjoy a much more simplified tax filing process—no more juggling between multiple forms, deadlines, and sometimes even different tax regulations.
• Reduced double taxation risk: Employees can avoid the double-filling hassle. For example, if both states collect income tax and do not have a reciprocity agreement, then the employee will have to file a nonresident tax return for the state where they work and a resident tax return for the state where they live. 
• Increased take-home pay: Employees who pay taxes only in one state keep more of their earnings, which can lead to significant savings over time. 

How reciprocity works for employers

‍State tax reciprocity agreements are beneficial to employers as well. Managing withholding taxes for employees who live in one state but work in another can be very difficult. But, when you are hiring from states with reciprocal tax agreements, the process gets much more simplified. You simply adjust your payroll to the employee’s state of residence. This equates to less paperwork and fewer chances of errors in tax withholding.Additionally, state tax reciprocity agreements boost cross-state employment. Workers are more likely to accept job offers across state lines when they do not have to deal with the hurdles of states with double taxation or complex tax filings. Furthermore, you no longer have to deal with the complexities of complying with different tax laws of multiple states.

Types of Reciprocity Agreements

Moving on, there are two types of reciprocity agreements.

• Bilateral agreements and
• Unilateral agreements.

Bilateral agreements

• Bilateral reciprocity agreements are those where both states agree on how to manage the taxes of cross-border workers.
• Generally, most reciprocal state agreements in the US are bilateral agreements. 

Unilateral agreements

• Unilateral reciprocity agreements are agreements in which one state decides how to deal with the taxes earned by its residents in another state. They do not require the other state to agree. 
• For example, Indiana, Wisconsin, and Indiana have a standing offer for reciprocity with any state that provides similar tax treatments to their residents.

Navigating State Tax Regulations for Remote Workers

Remote employees who work in one state and live in another sometimes need to file in two states. This is especially true when the states do not have a reciprocity agreement. In such scenarios, it is extremely important to determine the residency status in each state. 

Generally, employees must file as residents in their home state and non-residents in the state where they work. 

If the former, the employee will file a return reporting the income earned in a particular year. If the latter, they must file a return to report and pay taxes on income earned there. 

Most states offer tax credits to avoid being taxed twice on the same income.

An important thing to remember is that the tax rate may vary between states. If the employee’s home state has a lower income tax rate than their work state, or vice versa, then the credit system might not be enough to cover the entirety of the state tax they paid.

States with Reciprocal Tax Agreements and No State Taxes.

As mentioned below, we have highlighted the names of the reciprocal tax states.

Furthermore, there are also a few states that do not levy any income tax. They include,

• Wyoming
• Nevada
• Alaska
• Tennessee
• Florida
• South Dakota, and 
• Texas.

Best Practices for Filing and Compliance

Here, we have shared some tips and tricks on filing and managing taxes across state lines. 

• Remote workers must keep detailed records of their income, expenses, and the number of days spent working in each state. This will help them accurately report their income and deductions on tax returns.
• Carefully research the tax laws in the employee's home state and the state where they work remotely. This will include understanding the different taxation filing requirements, the tax rate, and whether there is a reciprocity agreement between the states.
• Be aware of the tax filing deadlines for each state. It can help avoid expensive penalties and interest for late filing.
• If needed, consult a tax professional who can help you understand the nuances of multi-state taxation.
• Keep up-to-date with all the tax law changes to take advantage of any new deductions or credits available.

How Skuad Can Help

When hiring employees across state lines, you can access a larger pool of talent without searching far and wide. But this can also pose a significant challenge if you are unaware of any reciprocity agreement rules you must follow. This becomes especially difficult for small-business owners since, more often than not, they lack the right tools and resources.

Skuad is a global employment platform enabling hiring and managing employees from anywhere. Its features include digitally onboarding new hires, streamlining international payments, and ensuring compliance with all country-specific labor and tax laws. 

Our team of experienced professionals will handle everything, starting from payroll calculations, accurate tax deductions, expense management, and payslip generation. We also have presence, and expertise across 160+ countries!

‍Book a demo today and experience customized and efficient solutions with Skuad!

FAQs

What is the reciprocity between states for taxes?

State tax reciprocity agreements refer to pacts between two or more states under which employees pay taxes only in the state where they live instead of the state where they work.

What states have reciprocity with each other?

Michigan, Arizona, Montana, and New Jersey are among the 17 states with reciprocal agreements.

What taxes do you pay if you live in one state and work in another?

If both states do not have a reciprocity agreement and collect income taxes, then employees usually have to file a nonresident tax return for the state where they work and a resident tax return for the state where they live.

Can you be taxed in multiple states?

Under the federal laws, two states are prohibited from taxing the same income. Therefore, for states without reciprocity, employees usually receive credit on some or all taxes withheld by their work state.