How does reciprocity work for employees who live in one state and work in another?

Reciprocity is like agreeing that you and your neighbor will feed each other’s cats when you go on vacation without keeping score about who goes out of town more often.

If you live in the west or work for a fully remote company, you probably haven’t had to think too much about people who commute across state lines and how their paychecks are taxed.

If you knew what it's like to work in New England or New York, it would blow your mind. For people who live in little states like those in New England or states with border cities like New York, DC, or Kansas City, it’s a real issue.

Here’s why:

👉 Unemployment tax is regulated according to the state where you actually work (or don’t, as the case may be) and therefore is taxed wherever you do work.

👉 Income taxes fund the communities where you spend time. They pay for things like roads, schools, and police. 

If you live in one place and work in another, you use the resources in both, so both jurisdictions want a piece of what you earn. 

Example without reciprocity

Let’s say you’re a chiropractor who lives in Manchester, NH but works in Boston, MA. After a snowstorm, you need both Massachusetts and New Hampshire to plow the roads for you to get to work. 

Taxes pay for plows. 

New Hampshire doesn’t charge income tax, but Massachusetts does. 

Whose plow are you paying for?

If the states don’t have a reciprocity agreement (like MA and NH don’t), then you pay income taxes in the state where you work first. If the tax rate in the state where you live is higher than where you work, you owe the difference to your home state. 

Since NH doesn’t have income tax and MA does, this person would only pay income tax in Mass. Their office wouldn’t have to register for NH taxes, and the chiropractor would fill out an out-of-state return to report their Mass taxes at the end of the year. 

But if they lived in MA and worked in NH, their office could choose not to register for Massachusetts taxes. If they don’t, the Mass resident would owe a big, fat payment to Taxachusetts at the end of the year.

It's a pain, confusing, and a lot of people mess up.

(Also, I have no idea how New Hampshire pays for plows. Do they just wait till spring to go anywhere?)

But those kind folks in the midwest have a better solution: 

Reciprocity!

Many midwestern states have reciprocity agreements where each state agrees to let the other handle payroll taxes. 

Without keeping score. 

It’s the state tax equivalent of saying, “It’s cool, bro. I know you’ll get me next time.” 

Let’s say you’re a chiropractor who lives in Gary, IN and works in Chicago, IL. You pay your income taxes in IN and unemployment taxes in IL. Done. 

Illinois doesn’t sweat the lost income tax because they know that somewhere out there, there’s an Illinois-based dentist drilling teeth in Indiana. It all comes out in the wash.

Cool, huh?

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