Reciprocal agreements and courtesy withholding

Federal law prohibits two states from taxing the same income—for employees who live and work in different states, and file more than one state tax return, reciprocal agreements exist so that they only pay income taxes to one state (usually their home state of residency) on the same wages.

Several states have reciprocal agreements with other states, so employees who work and live in those different states don’t have to have taxes withheld in more than one of them.

Reciprocal agreements usually state that:

Employers should withhold taxes in a non-resident employee’s home state.
The non-resident employee’s wages are not subject to tax rules in the state in which the wages were earned.
- Example: If an employee lives in California, but commutes to a work location in Arizona, employers should withhold income tax in California (per the reciprocal agreement between the states—see table below).

If reciprocity exists between the two states, employees will need to complete and deliver a non-residency certificate to you in order to have the residency state tax withheld instead of the work state tax.

Important reminder—unemployment registration may not be necessary in an employee’s home state

While reciprocity is determined by an employee's home address and pertains to their income tax withheld, unemployment liability is typically determined by an employee's work address.

Before registering for unemployment tax in a new state, reach out to an accountant or the applicable state agency for determination of liability.

States with reciprocal agreements

Resident State	Work State	Non-resident Certificate
States outside of District of Columbia	District of Columbia	D-4A
California, Indiana, Oregon, Virginia	Arizona	WEC
Iowa, Kentucky, Michigan, Wisconsin	Illinois	IL-W-5-NR
Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin	Indiana	WH-47
Illinois	Iowa	44-016
Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin	Kentucky	42A809
District of Columbia, Pennsylvania, Virginia, West Virginia	Maryland	MW 507
Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin	Michigan	MI-W4
Michigan, North Dakota	Minnesota	MWR
North Dakota	Montana	MT-R
Pennsylvania	New Jersey	NJ-165
Minnesota, Montana	North Dakota	NDW-R
Indiana, Kentucky, Michigan, Pennsylvania, West Virginia	Ohio	IT-4NR
Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia	Pennsylvania	REV-419
District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia	Virginia	VA-4
Kentucky, Maryland, Ohio, Pennsylvania, Virginia	West Virginia	WV/IT-104 R
Illinois, Indiana, Kentucky, Michigan	Wisconsin	W-220

Note: NY and NJ do not have reciprocity. If you work in NY and live in NJ, you will need to pay NY income taxes as a non-resident and pay NJ income taxes as a resident. However, NJ residents can take a tax credit for taxes that have been paid to other jurisdictions.

Set up reciprocity in Gusto

If reciprocity exists between your employee's state of residence and work state (read above), you can withhold their income taxes in their resident state.

Step 1. Register for a withholding ID with the resident state

If your employee's resident state already exists in your Gusto account with a withholding ID, you don't need to complete step one.

Register and obtain a withholding ID for this resident state.
- Head to the State Tax Registration section of our Help Center and follow the steps to register for withholding in the new state.
  - Keep in mind: While reciprocity is determined by an employee's home address and pertains to their income tax withheld, unemployment liability is typically determined by an employee's work address. Before registering for unemployment tax in a new state, reach out to an accountant or the applicable state agency for determination of liability.

Step 2. Receive a signed Certificate of Non-residency

Search online for the applicable state's non-residency certificate.
Give the non-residency certificate to your employee to fill out and sign.
Once you have a signed non-residency certificate from your employee, keep it stored for your records.
Click the People and select Team members.
Click your employee's name.
Scroll to their [State] Taxes section and click edit next to the state they work in.
Elect that the certificate has been filed and Gusto should not withhold in the work state.

Step 3. Elect to withhold income taxes in the resident state

Click the People and select Team members.
Click your employee's name.
Navigate to the Personal tab.
Under the Home Address section, click Manage Home Address.
For the current address, click Change Address.
Select I need to correct an error in [name]'s current home address from the dropdown.
Scroll to the "Pay home taxes?" section and select Yes, Gusto should withhold and pay the employee's home taxes.
- Reminder: Withholding on an employee's behalf may require your company to register for any corresponding agencies in the state.
- This option will only appear if the work address and home address are in different states.
Click Save.

Step 4. Enter a withholding ID for the resident state

If your employee's resident state already exists in your Gusto account with a withholding ID, you don't need to complete this step.

Click the Taxes & compliance section and select Tax setup.
Next to the employee's resident State Tax Setup, click Manage taxes.
Click edit.
Enter the withholding ID.
The next time you run payroll, we'll withhold and pay income tax to the employee's state of residence.

"Courtesy" withholding in Gusto

Income tax withholding requirements vary by state.

Gusto does not support flexible (variable) courtesy withholding*—for now, there are safeguards in place to make sure that the required payroll taxes, both unemployment taxes and income withholding taxes, are calculated and withheld based on the applicable address(es) on file for employees during the work period you pay them for.

Generally speaking, the work address is used to calculate both unemployment and income tax.
- This may not always be the case—as an example, there are some states with rules that dictate withholding income tax in the home state when the work state has no income tax or when the home state withholding rate is higher than the work state’s. Gusto supports all required withholding.

*Exception: courtesy withholding is supported for employees who work in Idaho, and live in either Washington or Wyoming.

If this applies to your employee, add (or edit) their home address and select Yes, Gusto should withhold and pay your employee's home state taxes before you save the update.

For states with reciprocal agreements, once you’ve set up reciprocity in Gusto the employee’s home address is factored into the income tax withholding logic.