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 her wages. Without reciprocity, she'd be looking at withholding in Indiana and a credit to untangle on her 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.

A few of these have conditions worth knowing. Kentucky's agreement with Virginia, and Virginia's with DC, apply only to daily commuters. Kentucky's agreement with Ohio doesn't cover a shareholder-employee who owns 20% or more of an S-corporation paying the wages. None of these usually touch a household nanny, but they're in the underlying rules (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 does nothing to 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:

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.

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 becomes your nanny's own responsibility. 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) still come out, and the home state's income tax becomes the nanny's own responsibility.

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?

No. Reciprocity covers state income tax only. Indiana county tax, Kentucky occupational tax, Ohio municipal tax, Michigan city tax, and Pennsylvania local taxes 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