Nanny Tax Reciprocity Between States

If your nanny lives in one state but drives to work in your home in a neighboring state, you've probably wondered which state's income tax to withhold. The answer often comes down to whether the two states have a reciprocity agreement. When they do, you don't withhold the work state's income tax at all, as long as your nanny files one short form with you.

This guide covers which states have these agreements, the form your nanny files, and the one part of the paycheck reciprocity does not cover.

What a reciprocity agreement actually does

A reciprocity agreement is a deal between two states that says: if your resident works across the border in our state, we won't tax those wages, because their home state already does. For a household employer, that means you stop withholding the work state's income tax once the certificate is on file.

Take the most common case we see: a nanny who lives in Kentucky and works in a family's home in Indiana. Indiana and Kentucky have a reciprocal agreement, so Indiana doesn't tax the nanny's wages. Without reciprocity, the nanny would be looking at withholding in Indiana and a credit to untangle on their Kentucky return. With it, the Indiana income tax simply comes off the paycheck.

One thing reciprocity does not change: where the work happens still drives unemployment insurance (SUTA), and your federal taxes are identical no matter where anyone lives. Reciprocity is narrowly about state income tax withholding.

The states with agreements

Each row below is the work state, the states whose residents it exempts, and the certificate your nanny signs. If your nanny works in a state on this list and lives in one of its partners, you can stop withholding that work state's income tax.

Some of these agreements come with conditions, and Virginia's are the ones most likely to catch a nanny. Virginia exempts a resident of Maryland, Pennsylvania, or West Virginia only if they're taxed in their home state, are present in Virginia for 183 days or less during the year, don't keep an abode such as a house or apartment in Virginia, and receive only wage or salary income there (Virginia Tax, Reciprocity). A nanny who works in your Virginia home five days a week is there on far more than 183 days, and so is a live-in nanny who works full time (Virginia may also treat the home they live in as their abode), so in either case you'd keep withholding Virginia tax. DC and Kentucky residents face a different test: Virginia exempts them only if they commute to Virginia every day and receive only wage or salary income there.

Maryland has a similar rule for live-in nannies. A resident of DC, Pennsylvania, or Virginia who keeps a place of abode in Maryland for 183 days or more becomes a statutory resident of Maryland, so the reciprocity exemption doesn't apply. A West Virginia resident doesn't owe Maryland income tax on wages however long they're there, but the form's exemption line only covers someone without a Maryland abode, so check with the Comptroller before you stop withholding for a live-in West Virginia nanny (Comptroller of Maryland, Form MW507).

Kentucky has three conditions of its own. Reciprocity doesn't apply at all to someone who keeps an abode in Kentucky and spends more than 183 days there during the year, which usually includes a live-in nanny. Its agreement with Virginia covers only daily commuters, and its agreement with Ohio doesn't cover a shareholder-employee who owns 20% or more of an S-corporation paying the wages (103 KAR 17:140).

Two pairs that look reciprocal but aren't: Arizona, Oregon, and California use a "reverse credit" system, which is a different mechanism, not a withholding exemption. And the Wisconsin–Minnesota agreement ended on January 1, 2010 and has not come back.

The part reciprocity does not cover: local taxes

Here is the detail almost everyone misses, and the one that trips up other payroll tools. Reciprocity suppresses state income tax. It almost never touches local taxes, which follow where the work physically happens.

Indiana is the clearest example. Indiana's Income Tax Information Bulletin #33 is explicit:

Indiana reciprocity agreements do not cover withholding requirements concerning Indiana Local Income Taxes... Employees who are residents of reciprocal states are subject to LIT in the same manner as residents of nonreciprocal states.

So a Kentucky resident working in Indiana pays no Indiana state income tax, but still owes Indiana county tax (LIT) on every paycheck. The same pattern holds across the agreement states:

Maryland is the one to watch for a Pennsylvania nanny. Form MW507 exempts them from the state portion only, and they "are still liable for withholding tax at the rate in effect for the Maryland county in which they are employed," unless they live in York or Adams County, or in another Pennsylvania locality that doesn't tax Maryland residents' earnings (Comptroller of Maryland, Form MW507). Maryland also works the other way for some nannies: a DC, Virginia, or West Virginia resident who qualifies files line 4 of the same form, which exempts them from Maryland withholding altogether, county tax included.

If a tool zeroes out the state income tax and forgets the county or city piece, the family ends up under-withholding and the nanny gets a surprise bill. Getting both halves right is the whole point.

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How your nanny claims the exemption

The exemption is never automatic. The work state assumes it should tax the wages until your nanny tells you otherwise, in writing, on its certificate.

1. Your nanny fills out the work state's form (for example, Indiana Form WH-47 or Kentucky Form 42A809) declaring they're a resident of the reciprocal state.
2. You keep the signed form in your records. With a couple of exceptions, you don't mail it anywhere. Maryland, Minnesota, and North Dakota ask for a copy to be sent to the state; the rest are employer-retained only.
3. Once it's on file, you stop withholding the work state's income tax going forward.

Most states treat the certificate as good until your nanny's residence changes. Virginia, Minnesota, and North Dakota are the exceptions: they want a fresh certificate every year, so plan to re-collect it each January.

What happens to the resident state's tax

Reciprocity moves the income tax to the home state, it doesn't erase it. Your nanny still owes income tax to the state they live in.

For a household employer, you generally don't withhold the resident state's tax. Household payroll withholds for the work state, and once reciprocity takes the work state off the table, the home-state tax usually becomes your nanny's own responsibility. Pennsylvania is the clearest exception. Its Form REV-419 says an employer who stops withholding Pennsylvania tax "must withhold the other state's tax," while its employer guide says Pennsylvania withholding isn't required for domestic workers in a private home, and neither says which applies to a family. If Pennsylvania is on either side of your pairing, ask the Pennsylvania Department of Revenue before you count on your nanny covering the home-state tax alone. A few home states, including D.C., West Virginia and Illinois, have their own withholding rules for household employers, and none says whether those rules reach a family in another state. If your nanny lives in one of them, or in a state this guide doesn't cover, ask that state's tax agency. Most people handle it with quarterly estimated payments or square it up on their resident-state return. It's worth giving your nanny a heads up, since their paycheck will show no state income tax withheld at all once you've set this up.

How NannyKeeper handles it

Most household payroll services don't model reciprocity, so families either over-withhold or guess. NannyKeeper detects the pairing automatically. When your nanny's work state and home state have an agreement, their profile shows a one-tap step to confirm you have the certificate on file. Confirm it, and we stop withholding the work state's income tax on the next payroll while keeping the county or city tax exactly where it belongs.

You can see the numbers for your own situation in the nanny tax calculator, or read the complete nanny tax guide for how the rest of the paycheck fits together.

FAQ

Do I withhold state taxes for a nanny who lives in a different state than they work?

You withhold for the state where the nanny works, not where they live. If the two states have a reciprocity agreement and your nanny files the work state's certificate, you stop withholding the work state's income tax. Local taxes (county or city) usually still come out, and the home state's income tax usually becomes the nanny's own responsibility. Pennsylvania is the main one to check: its Form REV-419 tells an employer who stops Pennsylvania withholding to withhold the home state's tax instead, and its employer guide says an employer in a partner state withholds Pennsylvania tax for a Pennsylvania resident who works there. D.C., West Virginia and Illinois also have household withholding rules of their own, so if your nanny lives in one of them, ask that state's tax agency.

What form does my nanny need to file for reciprocity?

The work state's nonresident certificate. Indiana uses Form WH-47, Kentucky uses Form 42A809, Ohio uses Form IT 4NR, Pennsylvania uses Form REV-419, and so on. Your nanny signs it, you keep it on file, and in most states it isn't submitted anywhere.

Does reciprocity mean my nanny pays no state income tax at all?

No. Reciprocity shifts the income tax from the work state to the home state. The home state still taxes the wages. Since household employers don't usually withhold the resident state's tax, your nanny typically covers it through estimated payments or their home-state return.

Does reciprocity cover county or city taxes?

Almost never. Reciprocity covers state income tax. One exception is Maryland, whose exemption for DC, Virginia, and West Virginia residents also covers county tax. Indiana county tax, Kentucky occupational tax, Ohio municipal tax, Michigan city tax, Pennsylvania local taxes, and Maryland county tax for a Pennsylvania resident (unless they live in York or Adams County or another Pennsylvania locality that doesn't tax Maryland residents) all still apply based on where the work happens, even when the state income tax is exempt.

How often does my nanny re-file the certificate?

In most states, the certificate is good until your nanny's residence changes. Virginia, Minnesota, and North Dakota require a new certificate each year.

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Related reading:

• Moving States? Your Nanny Tax Checklist
• The Complete Nanny Tax Guide
• How to Manage Nanny Payroll for Multiple Families