Applies to Basic Payroll, Full Service Payroll

If you have employees living or working in a state different than your main business state, these are considered non-resident employees, meaning they do not live in the state where they work.

There are some states that have made a reciprocity agreement with each other allowing the

If you want, you can provide them a non-resident certificate for the main business state. In some states, the non-resident certificate allows the employee to declare that they are exempt from income taxes for the business state, and instead income taxes will be withheld for their home state. For a full definition, see Non-resident in our Payroll Glossary.

Also see our blog article Which States Have Reciprocal Agreements… and What Does That Mean?

If reciprocity applies, the employee must request it. Reciprocity isn't automatic — the employee has to complete and submit the correct exemption or nonresidence certificate to their employer. Once the employer receives that completed form, they stop withholding tax for the work state and begin withholding for the employee's home state instead.

If no reciprocal agreement exists between an employee's home and work states, the employee may still be able to claim a credit on their home state return for taxes withheld and paid to the work state, though this varies by state.

Below is the full list of states with reciprocal agreements, along with the specific nonresident/exemption certificate each employee needs to file, and a link to the current version of that form.

Arizona
Reciprocates with: California, Indiana, Oregon, and Virginia
Form: WEC, Employee Withholding Exemption Certificate
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Washington, D.C.

Reciprocates with: Maryland and Virginia
Form: D-4A, Certificate of Nonresidence in the District of Columbia
To qualify as a D.C. nonresident for this purpose, the employee must have a permanent home outside D.C. and must not live in D.C. for 183 days or more during the year.
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Reciprocates with: Iowa, Kentucky, Michigan, and Wisconsin

Form: IL-W-5-NR, Employee's Statement of Nonresidence in Illinois

Iowa
Reciprocates with: Illinois only
Form: 44-016, Employee's Statement of Nonresidence in Iowa
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Reciprocates with: Illinois, Indiana, Michigan, West Virginia, and Wisconsin, plus conditional agreements with Ohio and Virginia
Form: 42A809, Certificate of Nonresidence
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Special conditions: The Virginia agreement only applies to Virginia residents who commute daily to work in Kentucky. The Ohio agreement excludes S corporation shareholder-employees who own 20 percent or more of the company.

Reciprocates with: D.C., Pennsylvania, Virginia, and West Virginia
Form: MW507, Employee's Maryland Withholding Exemption Certificate
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Reciprocates with: Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin
Form: MI-W4, Employee's Michigan Withholding Exemption Certificate
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Reciprocates with: Michigan and North Dakota
Form: MWR, Reciprocity Exemption/Affidavit of Residency
To qualify, the employee must maintain a permanent home in Michigan or North Dakota and return there at least once a month. Form MWR must be refiled with the employer every year to keep the exemption in place.
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Reciprocates with: North Dakota
Form: MW-4, Montana Employee's Withholding Allowance and Exemption Certificate
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Reciprocates with: Pennsylvania only
Form: NJ-165, Employee's Certificate of Non-Residence in New Jersey
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Reciprocates with: Minnesota and Montana
Form: NDW-R, Reciprocity Exemption from Withholding for Qualifying Minnesota and Montana Residents
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Reciprocates with: Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia
Form: IT 4NR, Employee's Statement of Residency in a Reciprocity State
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Reciprocates with: Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia
Form: REV-419, Employee's Nonwithholding Application Certificate
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Reciprocates with: D.C., Kentucky, Maryland, Pennsylvania, and West Virginia
Form: VA-4, Employee's Virginia Income Tax Withholding Exemption Certificate
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Reciprocates with: Kentucky, Maryland, Ohio, Pennsylvania, and Virginia
Form: WV/IT-104NR, West Virginia Certificate of Nonresidence

Reciprocates with: Illinois, Indiana, Kentucky, and Michigan
Form: W-220, Nonresident Employee's Withholding Reciprocity Declaration
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When an employee submits a completed nonresidence or exemption certificate, stop withholding income tax for the work state and start withholding for the employee's home state instead. Keep the signed certificate on file, since most states require it to be refiled periodically (annually, in several cases) to keep the exemption active.

An employee who wants to take advantage of reciprocity must proactively complete and submit the correct form for their work state — it will not happen automatically. If an employee doesn't file the form, the employer must continue withholding tax for the work state as normal.

If you have a non-resident certificate on file for the employee, you will need to indicate this in their Taxes page. You’ll see a “Missing Information” item for this employee if you have indicated in your Company Tax Settings page that you are withholding income tax for this state. See Multi-State Income Tax Withholding for more details.

To indicate whether a non-resident certificate is on file for an employee:

If your state has a non-resident certificate, the system will apply the tax rules and will determine which state tax to withhold. If the two states do not have a reciprocal agreement, the software will ignore this field even if it is check as Yes.