Reciprocity is an agreement between two states that allows residents of one state to apply for an exemption from the tax deduction in the other (reciprocal) state. Suppose an employee lives in Pennsylvania but works in Virginia. Pennsylvania and Virginia have a mutual agreement. The employee only has to pay government and local taxes for Pennsylvania, not Virginia. They keep taxes for the employee`s home state. Note: While reciprocity is determined by an employee`s home address and refers to withholding income tax, the unemployment rate is generally determined by an employee`s work address. Before registering for unemployment tax in a new state, please contact an accountant or the state agency responsible for establishing liability. States that re-specify for taxes include: at the end of the year, you use the W-2 form to tell the employee how much you have withheld for state income tax. Montana has a fiscal counter-value with North Dakota. Residents of North Dakota working in Montana can apply for an exemption from the State of Montana income tax. You do not pay taxes twice on the same money, even if you do not live or work in any of the states with reciprocal agreements. You just have to spend a little more time preparing several state returns and you have to wait for a refund for taxes that are unnecessarily withheld from your paychecks.
Note: NY and NJ have no reciprocity. If you work in New York and live in NJ, you must pay income tax as a non-resident and pay NJ income tax as a resident. However, NJ residents can benefit from a tax credit for taxes paid to other countries. Nexus`s combination and reciprocity helps employers determine whether or not you keep taxes on employees` paychecks. Where an employer is not related to a worker`s state of residence, but there is a mutual agreement between the two states, the employer must abide by the reciprocity agreement and cannot withhold income tax from the state in which the worker works. However, the employer is not required to withhold income tax for the state in which the worker lives, because the employer has no connection to the resident state (the worker should, in this scenario, pay estimated taxes). If an employee lives in a state without a mutual agreement with Indiana, he or she can receive a tax credit for taxes withheld for Indiana.