Reciprocity Agreements: What They Mean for Multi-State Employees

In a world where employees routinely cross state lines for work—or work remotely from states other than their employer’s primary location—reciprocity agreements are one of the few mechanisms that simplify multi-state payroll tax administration. When they exist, they eliminate the need for employers to withhold income tax for both the work state and the resident state. When they don’t exist—or when they’re misapplied—they create cascading problems for employers, employees, and tax agencies alike.

What Is a Reciprocity Agreement?

A reciprocity agreement (sometimes called a reciprocal agreement or reciprocity compact) is a tax treaty between two states that allows residents of one state who work in the other to pay income tax only to their state of residence—rather than the state where they physically perform work.

Without reciprocity, the default rule is that wages are taxable in the state where work is performed. An employee who lives in New Jersey but works in New York would typically owe income taxes in both states—New York because that’s where the work happened, and New Jersey because that’s where they live. The resident state (New Jersey) typically allows a credit for taxes paid to the work state (New York), which prevents true double taxation. But it still means the employee files two returns and the employer must withhold for two states.

With a reciprocity agreement, the complexity is reduced: the employer withholds only for the employee’s home state, the employee files only a home-state return, and the work state is taken out of the equation entirely.

Where Reciprocity Agreements Exist

Reciprocity is not universal. As of 2025, reciprocal agreements exist among a relatively small subset of state pairs, primarily in the Mid-Atlantic and Midwest regions. Some notable examples:

• Pennsylvania has agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia
• Illinois has an agreement with Iowa, Kentucky, Michigan, and Wisconsin
• Virginia has agreements with D.C., Kentucky, Maryland, Pennsylvania, and West Virginia
• Maryland has agreements with D.C., Pennsylvania, Virginia, and West Virginia
• Ohio has agreements with Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia
• Michigan has agreements with Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin

The specific terms and mechanics vary by agreement. Some are broad; some cover only certain categories of income or workers. Payroll teams should verify the current status and terms of any agreement rather than relying on outdated documentation.

Importantly, many high-population state pairs have no reciprocity at all. New York and New Jersey have no reciprocity agreement (New Jersey terminated its agreement with Pennsylvania in 2017, though that was later reversed—a reminder that these agreements can change). California has no reciprocity agreements with any state.

How Reciprocity Works in Practice

For reciprocity to apply, the employee must be a resident of one of the agreement states and must perform work in the other. The key word here is “resident”—not just “lives.” State residency rules can be complex for certain employees, particularly those with multiple homes or recent moves.

To claim reciprocity, the employee typically must provide the employer with a completed exemption certificate—a form specific to the work state—declaring that they are a resident of the agreement state and requesting exemption from work-state withholding. Examples:

• In Pennsylvania, a New Jersey resident working in Pennsylvania submits Form REV-419
• In Maryland, a Virginia resident working in Maryland submits MW-507
• In Ohio, an Indiana resident working in Ohio submits IT-4-NR

Without this certificate, the employer is not protected and should generally default to withholding for the work state. If an employee later claims reciprocity and the employer didn’t have a certificate, it can create headaches at year-end when the employee files their return and expects a refund from the work state.

Employee Obligations Under Reciprocity

From the employee’s perspective, reciprocity is a significant simplification. They only have to file one state return—their home state. They don’t need to file a nonresident return in the work state (assuming they have no other income from that state).

However, employees must understand that reciprocity applies only to the income taxes between the two specific agreement states. If they also have income from a third state—say, consulting income from a client in California—they’ll need to file in California regardless of any reciprocity between their home state and work state.

What Happens When Reciprocity Agreements Change

Reciprocity agreements can be modified or terminated by either state, typically with advance notice. This creates real operational risk for employers who have established workflows around a specific agreement.

The New Jersey-Pennsylvania situation is instructive. In 2016, New Jersey announced it was terminating its long-standing reciprocity agreement with Pennsylvania, effective January 1, 2017. This would have required Pennsylvania residents working in New Jersey (and vice versa) to file in both states and for employers to withhold for both states. It affected hundreds of thousands of workers in the greater Philadelphia metro area.

The termination was ultimately reversed—New Jersey rescinded the termination notice before it took effect—but the episode created significant uncertainty and forced payroll teams across the region to scramble to understand the implications. It also demonstrated that even well-established agreements can’t be assumed to be permanent.

The Work-From-Home Complication

Remote work has added new complexity to reciprocity administration. When an employee who was previously commuting to a work state transitions to full-time remote work from their home state, the reciprocity analysis changes.

Under most agreements, reciprocity applies when a resident of State A performs work in State B. If that same employee now performs all their work in State A (their home state), there’s no longer a State B nexus for withholding purposes—the employee simply owes tax in their home state, and the reciprocity agreement is irrelevant. The employer should update their withholding to reflect only the employee’s home state.

But the reverse situation—an employee who didn’t previously use reciprocity now working from home in State A when their employer is in State B—might newly qualify for a simpler withholding arrangement depending on how work-state nexus is determined. The rules here are genuinely complex and vary by state.

Practical Guidance for Payroll Teams

Managing reciprocity correctly requires a few consistent practices:

Maintain a current matrix of applicable agreements. Know which states you have employees in, and which agreements apply to those state pairs. Update this matrix annually or when changes are announced.

Collect exemption certificates at onboarding and annually. Don’t rely on certificates collected at hire without periodically confirming they’re still accurate. Employees change residence, and an outdated certificate can lead to incorrect withholding.

Default to work-state withholding absent a certificate. If an employee hasn’t provided an exemption certificate, withhold for the state where they perform work. The burden is on the employee to claim the reciprocity exemption.

Watch for agreement changes. Monitor state tax agency announcements in states where you have significant cross-border employee populations. A terminated agreement can require rapid payroll system updates.

Reciprocity is one of the genuine simplifications available in multi-state payroll tax—but only when it’s administered correctly. Getting it wrong doesn’t just affect your filing obligations; it directly affects your employees’ tax situations, and that’s a much more visible error.