State Tax Reciprocity and Courtesy Withholding: What You Need to Know

For employees who live in one state and work in another, reciprocal agreements ensure that they only pay income tax to one state—usually their state of residency. Below, we’ll break down how this works and how to manage it using GoCo Embedded Payroll

Understanding Reciprocity Agreements

Reciprocity agreements between states simplify tax withholding for employees who live and work in different states. These agreements generally specify:

1. Employers withhold income taxes for the employee’s state of residence (home state).
2. Non-resident employees are exempt from tax rules in the state where they work.

Example:

If an employee resides in California but commutes to a job in Arizona, taxes should be withheld in California, per the reciprocal agreement between these states.

Setting Up Reciprocity

If a reciprocity agreement exists, employees will need to complete a non-residency certificate for you to withhold taxes for their home state instead of the work state. Follow these steps to set up reciprocity and, if applicable, set up Courtesy Withholding in GoCo Embedded Payroll.

Step 1: Register for a Withholding ID in the Resident State

If you haven’t registered in the employee’s home state, you’ll need to:

1. Visit the state tax agency’s website.
2. Register for a withholding ID specific to the state.
3. Refer to GoCo's Payroll Tax Account Management Help Center guidance.

Step 2: Obtain a Signed Certificate of Non-Residency

1. Download the applicable state's Certificate of Non-Residency (refer to the table below for specific forms).
2. Provide the certificate to your employee for completion and signature.
3. Store the signed form securely for your records.
   
   

⚠️ If your employee requires Courtesy Withholdings, you will want to follow the next steps. If you employee does not require Courtesy Withholdings, no further action is needed within GoCo. 

Step 3: Register and Enter the Withholding ID for the Resident State

If you have not registered for a withholding account in the employee’s resident state check GoCo Help Center: State Tax Payroll Guides

After completing your account registration: 

1. Go to the "Settings" tab in your Payroll app in GoCo.
2. Here you should find a card that reads "Tax Settings".
3. Once expanded, you will see sections for your Federal & State Tax information.
4. Add the withholding ID for the resident state and all relevant details
   (If you do not see the state populated to provide details, please reach out to support@goco.io with the state you are wanting to update, provide all the details of your new account when you send in the request)
5. Save your changes.

For step by step guidance on updating payroll tax accounts, check out Payroll Tax Settings Help Article

Step 4: To complete Courtesy Withholding

1. Contact support@goco.io 
2. Provide Employee you are wanting to activate courtesy withholding and confirm the location of the courtesy withholding requested 
3. Once GoCo has completed the set up, you will receive a confirmation 

States with Reciprocal Agreements

The table below lists states with reciprocal agreements and the forms required:

For any additional questions, please reach out to us at support@goco.io 💚