About reciprocal agreements or tax credits for state withholding

unavailable in ajeraCore unless you have the Payroll add-on

Employees pay state withholding taxes where taxes are required. Wages are generally taxed by the state where the employee performs the services. The state where the employee is a resident (home state) generally taxes all income, even if sourced from outside the state. A home state credit for taxes paid to other states, where applicable, helps mitigate double taxation.

A reciprocal agreement is an agreement between two states that relieves nonresident employees of tax liability for the state where they work. The employer withholds state tax only for the state where the employee is a resident.

Setting up payroll to handle reciprocal agreements or state tax credits

Here are some examples for setting up payroll in these situations:

• You have employees who work in states that have reciprocal agreements, where the state withholding tax is paid to the employee’s home state.
• You have employees who work in multiple states, and the home state allows a credit for taxes paid to the work state.

Example 1: An employee works in states with reciprocal agreements

An employee lives in Pennsylvania, but works in both Pennsylvania and New Jersey. Pennsylvania and New Jersey have a reciprocal agreement.

For wages earned in New Jersey, the employee pays state withholding taxes to Pennsylvania (the employee's home state). The employee completes an Employee’s Certificate of Nonresidence in New Jersey.

You do the following in Ajera:

1. Click the Company > Preferences > Payroll tab, and do the following:

• Select the Allow state taxes from multiple states on one paycheck check box.
• Select the Automatic SWH reciprocity calculations check box.
• In the Reciprocal State Withholding (SWH) fields, select Pennsylvania in the first available field.

2. Click the Setup > Employees > Payroll Taxes tab, and do the following:

• In the Home State field, select Pennsylvania.
• In the Default Work State field, select New Jersey.
• In the State Taxes table, enter one row for each state:

• Pennsylvania
• New Jersey (be sure to select the Non Res check box, which indicates that the employee filled out a certificate of nonresidency).

Example 2: An employee is allowed a credit for taxes paid to another state

An employee lives in New York, works in New Jersey, and is therefore taxed in both states. There is no reciprocal agreement between these states.

New York withholds tax on all income earned by residents and allows a credit for nonresident state withholding. New York tax withheld is the full amount, less the credit for New Jersey taxes paid.

You do the following in Ajera:

1. Click the Company > Preferences > Payroll tab, and do the following:

• Select the Allow state taxes from multiple states on one paycheck check box.
• Select the Automatic SWH reciprocity calculations check box.
• In the Reciprocal State Withholding (SWH) fields, select New York in the first available field. This applies the credit for New Jersey taxes against New York taxes.

2. Click the Setup > Employees > Payroll Taxes tab, and do the following:

• In the Home State field, select New York.
• In the Default Work State field, select New Jersey.
• In the State Taxes table enter one row for each state:

• New York
• New Jersey

See also

About state withholding for multiple states