Introduction

State tax reciprocity agreements are becoming a key element of payroll compliance in an age of remote working, cross-border commuting, and multi-state workers. To employers who handle such payrolls of teams residing in one state and working in another, there is no other option but to learn these agreements.

Reciprocity in state taxation implies that the residents of a particular state can only pay income tax to the home state instead of both. This eases withholding, compliance, and filing employee requirements. In cases where the business deals with multi-state payroll, the appropriate process and software can simplify this a great deal.

This guide dives into what tax reciprocity between states means, which states have agreements, and how you, as an employer, can manage multi-state withholding when these rules apply.

What Are Tax Reciprocity Agreements?

A tax reciprocity agreement is an agreement between two or more states under which employees who have their residences in one state but work in another state are taxed by their home state instead of both.

Example: If an employee resides in State A but is employed in State B and has a reciprocity agreement, the employer is only required to withhold the state income tax of State A (the employee's home state) rather than that of State B (the employee's work state).

The benefit? Lessons: Administrative load will be less, payroll withholding will be more transparent, and fewer headaches at tax time. The compliance risk is considerably reduced for employers who handle this properly.

The same applies to the reciprocity agreements, as in most cases they are limited to the income tax withholding and not the federal tax or employment taxes, such as the social security and Medicare.

Why These Agreements Matter for Employers

In the case of businesses that have employees residing in different states than the place where they work, it is important to learn about the aspect of reciprocity due to several reasons:

• Accurate withholding: In case your worker is covered by a reciprocity agreement, the erroneous state tax could be withheld, leaving the worker with unforeseen tax returns or remitting twice.
• Payroll software configuration: Your payroll system needs to support exemption forms and state-specific rules for reciprocity.
• The compliance risk: The inability to use the appropriate state withholding may result in fines, audits, and the dissatisfaction of the employees.
• Remote work effect: As more and more remote workers work in different states, the complication of multi-state withholding increases, and reciprocity can provide a solution.

The employer has to check whether the home and work states of an employee have a mutual agreement; the employee has to produce an exemption where needed, and payroll withholding should be updated.

Which States Have Tax Reciprocity Agreements?

Not every state has reciprocity. Based on the latest statistics, approximately 30 reciprocal deals exist in approximately 16 states and the District of Columbia.

Employer implication: When your company or staff works across these states, you will have to understand the exact exemption forms, deadlines, and state regulations that would be used.

How Employers Should Handle Multi-State Payroll Under Reciprocity

The following is a checklist method of administering the salaries of employees under reciprocal agreements:

1. Determine the employee’s resident (home) state and work state

You will need to check on their residential places, place of work, and how the two states will coexist as per the existing agreements.

2. Check if the two states have a reciprocity agreement

In case of yes, the employee can be excused from withholding in their work state and have their taxes deducted in their resident state.

3. Obtain the required exemption form

Otherwise, each state normally has a particular form (e.g., VA-4 in Virginia) that the employee should file in order to have you cease withholding in the work state.

4. Configure your payroll software correctly

Ensure your system supports:

• Exemption form uploads
• Withholding state override
• Proper taxation in the home state.
• Reporting on behalf of the two states as required.

5. Monitor and document compliance

• Keep track of the exemption reports.
• Status of update withholding in case of a change in the state of residence or state of work of the employee.
• Follow up on local taxing of cities or counties that can still exist.

6. Communicate with employees

Explain their tax responsibility clearly: they’ll file taxes mainly in their resident state and may avoid a separate nonresident filing if the agreement applies.

7. Stay updated on rule changes

The state legislations will change, particularly with the increased remote work. Agreements or enforcement criteria can be changed by some states.

What If There’s No Reciprocity Agreement?

In a case where the employee resides in one state and works in another, but there is no reciprocity agreement, both states may require the employer to do the withholding, or it may require the employee to file more than one return.

In this scenario:

• Withholding could be obligated in the state of work.
• Finally, the employee might be taxable to the home state.
• The home state may provide a tax credit in foreign states.
• Payroll should be set to support various jurisdictions.

As an employer, make sure that your payroll program is capable of doing multi-state withholding and filing, and that you explain to employees that they may be subject to dual-state income taxation.

Best Payroll Software Features for Employers Managing Reciprocity

In case you have multi-state workers, your payroll and HR system must be able to provide:

• Management of the exemption form in state reciprocity states.
• Auto withholding state override where the exemption is qualified.
• Support to calculate and report taxes in different states.
• Residency, remote working, work address, and commuting states tracking.
• Instant notifications of the cross-state employees.
• Integration of remote work policy and HR policy.

Using payroll software that handles multi‐state withholding reduces risk and administrative burden.

Employer Compliance Guide: Key Points to Remember

• Make new employees complete their work state and home state.
• Use software to indicate when a home-state work-state combination corresponds to a familiar reciprocity agreement.
• Exemptions are stored as part of the employee file.
• Plan regular reviews of employees whose home/work association alters.
• Ensure that days worked by remote employees in other states do not impact eligibility for reciprocity.
• Check on any city or local taxes that might still be applicable even in the case of reciprocity.

Conclusion

Reciprocity agreements with state taxes provide an excellent reprieve to employees- and a cheat to compliance by employers. In 2025, when businesses that deal with multi-state payroll have to know how these agreements operate, which states are covered, and how to program their payroll system, it is not a best practice but a prerequisite since it is required to be known and configured.

The correct payroll software, maintenance of accurate records, and a proactive approach towards the state tax regulations can be the factors that will mitigate risk, ease withholding, and assist employees in avoiding duplicative taxation by implementing the right payroll software.

Need to stream your multi-state payroll and remain in compliance with reciprocity agreements?

Contact PayProNext, your multi-state automation, remote employee withholding, and compliance partner. Get your free consultation.