What Types of Income Are Covered Under Reciprocity Agreements?

State tax reciprocity agreements are a helpful tool for residents who live in one state and work in another. These agreements simplify income tax obligations by preventing double taxation on certain types of income, primarily wages and salaries. But it's important to understand that not all income qualifies under these agreements.

Covered: Wages and Salary Income Only

Reciprocity agreements between states—including Virginia’s agreements with the District of Columbia, Kentucky, Maryland, Pennsylvania, and West Virginia—apply only to wage and salary income. This refers to earnings paid by an employer and typically reported on a W-2 form. If you are an employee working across state lines and meet the eligibility criteria, your income is taxable only in your state of residence, even if you work in another state.

This means you can avoid income tax withholding in your work state by submitting the proper exemption form, and you only need to file a tax return in your home state for that income.

Not Covered: Other Types of Income

It's important to note that reciprocity agreements do not apply to non-wage income. If you earn any of the following types of income in a reciprocal state, you may still be subject to tax in that state and be required to file a nonresident return:

• Self-employment or business income – Profits from freelance work, consulting, or running a business across state lines.
• Rental income – Income from real estate or properties located in the nonresident state.
• Capital gains – Profits from the sale of property, stocks, or other assets located or sold in the work state.
• Unemployment compensation – Depending on state rules, this may be taxable where it is received.
• Partnership, S corporation, or LLC income – Distributions or profits passed through from entities operating in the reciprocal state.

Why It Matters

Knowing what income is and isn’t covered can help avoid costly tax mistakes. If you have mixed income sources, consult a tax professional to ensure proper state filings and avoid penalties or delays in refunds.

Unsure if your income qualifies under reciprocity? Contact Watter CPA today for expert guidance on multi-state taxes and non-wage income reporting.