Navigating State Tax Withholding in Reciprocity Situations

When employees live in one state and work in another, employers must handle reciprocity agreements and tax withholding with care. Here’s how Greenshades helps employers manage these complex multi-state payroll situations. 

Understanding the Scenario 

Here is an example to understand the situation: 

✔ Employee lives in Indiana, works in Illinois 
✔ Under reciprocity, the employer typically withholds Indiana State Income Tax (SIT), not Illinois 
✔ But if the employer doesn’t have a tax account in Indiana, they may not be required to withhold Indiana SIT 

📌 In such cases, employers must determine whether to withhold Illinois tax and advise employees to make estimated payments to their home state (Indiana) 

Key Considerations 

 ✔ Reciprocity Agreements & Non-Resident Certificates 

• Employers should confirm reciprocity agreements between states 
• Employees may need to complete non-resident certificates to exempt work-state withholding 
• If the employer lacks a tax account in the employee's home state, withholding may not be required 

 ✔ System Behavior in Greenshades 

• Greenshades identifies the employee’s resident state and applies tax rules accordingly 
• Reciprocity rules inform withholding, but the system cannot detect employer registration status 
• If withholding isn’t required, mark the employee exempt from SIT in the system 
• Greenshades still tracks subject wages to help employees calculate estimated payments 

📌 Best Practices for Multi-State Employers 

✔ Understand and review reciprocity agreements regularly 
✔ Determine if you have a tax account in the employee’s home state 
✔ Configure payroll settings to: 

• Mark employees exempt from resident-state withholding if needed 
• Continue tracking subject wages for tax reporting 

• Keep documentation of non-resident certificates and tax decisions 

 📌 Stay Compliant with Greenshades 

Greenshades helps employers handle complex multi-state payroll scenarios by enabling flexible configuration and wage tracking. With proper setup, you can ensure tax withholding remains accurate—even across state lines. 

Do you have a similar payroll tax question? Reach out to our team for insights and best practices!