What is your company’s interstate payroll taxes filing requirements when you have employees that cross state lines?
By Meg Eynon, Vice President, The Payroll Factory®
Published: 09 MAY 06
Most states that have a personal income tax require that the tax is to be paid on all income that is earned in that state, including income from employees who do not live in that state but work there. If the state where an employee lives has a personal income tax, the employee will also have to file an annual tax return for all of their income earned, regardless of where it was earned. The employees are usually able to apply for a credit in their state of residence for taxes that they paid in another state.
But is there a better way to treat the taxes of employees who have to cross state lines to come to work for your company?
In order to relieve employees of the problem of filing two state tax returns at the end of the year and sometimes owing taxes to their home state because of differences in tax percentages, many states have entered into what is called reciprocal agreements.
How does this work?
If two states have a reciprocal agreement and an employee lives in one of those states and works in the other state, the employee will only be subject to the tax in the state where the employee lives.
Many of the states with these agreements do not require the employer to withhold tax in the state where the employee lives. Many employers do so anyway for the benefit of the employee. This takes the burden off of the employee to make estimated tax payments. For employers who want to voluntarily withhold the lived in state tax, they can set up a voluntary withholding account with that state to remit the taxes on the employee’s behalf.
The chart below can help guide you to understand if your state has a reciprocal agreement with the states surrounding it.
| State | States with Reciprocal Agreements |
| Illinois | Iowa, Kentucky, Michigan, Wisconsin |
| Indiana | Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
| Iowa | Illinois |
| Kentucky | Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, Virginia |
| Maryland | District of Columbia, Pennsylvania, Virginia, West Virginia |
| Michigan | Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin |
| Minnesota | Michigan, North Dakota, Wisconsin |
| Montana | North Dakota |
| New Jersey | Pennsylvania |
| North Dakota | Minnesota, Montana |
| Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
| Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
| Virginia | Kentucky, Maryland, District of Columbia, Pennsylvania, West Virginia |
| West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
| Wisconsin | Illinois, Indiana, Kentucky, Michigan, Minnesota |
For more information on how reciprocal agreements work and how to set up a voluntary employer income tax withholding account contact your state directly.