Reciprocity — Employee Withholding

Minnesota has income tax reciprocity agreements with Michigan and North Dakota.

Employees who are employed outside their state of residence may be subject to income tax laws of two states: their state of residence and the state in which they are employed. Reciprocity helps to prevent the same personal service income (wages, salaries, tips, commissions, and bonuses) from being taxed by more than one state. Generally, only the employee’s home state will tax their personal service income earned while working in a reciprocity state.

To qualify for the reciprocity exemption, both of these must apply for the year:

• The employee is a resident of Michigan or North Dakota who works in Minnesota — or a Minnesota resident who works in Michigan or North Dakota — and returns to their state of residence at least once a month
• The employee received personal service income from working in a reciprocity state

Minnesota Companies with Employees Who are Residents of Reciprocity States
If you are a Minnesota company and you are required to withhold federal income tax from an employee residing in a reciprocity state, you are also required to withhold Minnesota income tax in most cases.

If your employee does not want you to withhold Minnesota tax from their wages, they must give you a completed Form MWR, Reciprocity Exemption/Affidavit of Residency. They must provide Form MWR by February 28 each year or within 30 days after they begin working or change their permanent state of residence. To continue being exempt from Minnesota withholding tax, the employee must submit a new Form MWR to you each year.

You have until March 31 of each year or within 30 days after they give you a Form MWR to submit copies to the Minnesota Department of Revenue. For details, see the Form MWR instructions.

Companies in Reciprocity States With Employees Who are Minnesota Residents
If you are a company located in a reciprocity state, you are not required to withhold Minnesota tax from an employee who is a Minnesota resident. You may choose to do so as a courtesy to your employee.

If you choose not to withhold Minnesota tax, your employee may be required to make regular estimated tax payments to us. Your employee is required to pay estimated tax if they expect to owe $500 or more on their Minnesota Form M1, Individual Income Tax.

Minnesota Companies with Employees Who are Residents of Reciprocity States
If you are a Minnesota company with an employee who is a resident of Michigan or North Dakota, you are not required to withhold income tax for the reciprocity state. We encourage you to do so as a courtesy to your employee.

Contact the reciprocity state’s tax department for instructions.

If you choose not to withhold, your employee may be required to make regular estimated tax payments to the reciprocity state.

Companies in Reciprocity States with Employees Who are Minnesota Residents
If you are a company located in a reciprocity state and you choose to withhold Minnesota tax from a Minnesota resident, you must register for a Minnesota Tax ID Number.

If you already have a Minnesota ID number for other Minnesota taxes for the same business, you can use the same number for withholding tax. To do so, log in to our e-Services system. You will need to activate a withholding tax account.

If you do not have a Minnesota ID number, you must apply for one. Apply online or call us at 651-282-5225 or 1-800-657-3605.

When you are filing your Minnesota withholding tax return, always report wages of the employee who has supplied you with a Form MWR. Do this even if you are withholding tax for the reciprocity state. Do not report the tax withheld for the other state on your Minnesota return.

If you withheld tax for the reciprocity state, contact the reciprocity state’s tax department for instruction.

If you withheld tax for both Minnesota and the reciprocity state, report the Minnesota tax withheld on your Minnesota withholding tax return and report the amount withheld for the reciprocity state on that state’s tax return.

If you did not withhold tax for Minnesota or the employee’s state of residence, complete the employee’s Form W-2 as follows:

• In box 15 (State), enter the employee’s state of residence
• In box 16 (State wages, tips, etc.), enter the employee’s wages
• In box 17 (State tax), enter zero

If you withheld tax for your employee’s state of residence, complete your employee’s Form W-2 as follows:

• In box 15 (State), enter the employee’s state of residence
• In box 16 (State wages, tips, etc.), enter the employee’s wages
• In box 17 (State tax), enter the total tax withheld for the year for the state of residence

If you received a valid Form MWR from your employee, you do not need to send us a copy of Form W-2. You may need to send a copy of the employee’s Form W-2 to their state of residence. Contact the reciprocity state’s tax department for requirements.

Keep a copy of the employee’s Form W-2 with your tax records.

We can assess you a $50 penalty for each Form MWR you do not send to us as required.

If you file a Form MWR that you know is incorrect, we can assess a $500 penalty for each incorrect form filed.