State tax reciprocal agreements and courtesy withholding

This article is for admins who withhold state taxes for employees who live in one state and work in another.

We use the employee addresses you set up in Gusto to apply the correct state tax rules.

Your employee may owe state taxes in two places if they live in one state and work in another. But federal law stops both states from taxing the same income.

Many states have reciprocal agreements. This is when two states agree to let employees pay income tax to only one state, usually where they live. If the two states do not have reciprocity, you may need to withhold income tax for both states.

How reciprocal agreements affect state tax withholding

If a reciprocal agreement applies between two states, you withhold taxes for your employee’s home state instead of their work state.

If reciprocity applies:

Example

An employee lives in California and works in Arizona. You withhold income tax for California (the home state) because of the reciprocal agreement between the states. If no reciprocal agreement exists between the states, you must follow both states’ tax withholding rules.

Reciprocity and unemployment tax

Reciprocity applies only to income tax withholding, not unemployment tax. Unemployment tax usually depends on where the employee works, not where they live. Before you register for unemployment in another state, contact an accountant or the appropriate state agency to confirm where you owe unemployment tax.

Non-residency certificate requirements

To apply reciprocity, your employee must fill out and sign a non-residency certificate for their home state. This form tells you to withhold income tax in their resident state instead of the work state.

You can find each state’s non-residency certificate in the States with reciprocal tax agreements section of the article or by searching your state’s tax website. Keep a signed copy in your records.