Illinois Reciprocity Agreements: What You Need to Know
If you`re planning to move to Illinois or already live in the state, it`s essential to understand the concept of reciprocity agreements. These agreements can have significant implications on your taxation and employment.
Reciprocity agreements refer to agreements made between two states in which they agree to recognize each other`s tax laws, allowing individuals who earn income in one state and reside in another to pay taxes only to their state of residence. This can prevent double taxation and provide a considerable tax benefit.
Illinois has reciprocity agreements with four states, namely Iowa, Kentucky, Michigan, and Wisconsin. If you`re a resident of any of these states working in Illinois, you don`t have to pay Illinois taxes on your wages.
However, understanding the rules regarding Illinois reciprocity agreements can be complicated. Suppose you`re a resident of any of the four states mentioned above working in Illinois. In that case, you`ll need to complete Form IL-W-5-NR, Employee`s Statement of Nonresidence in Illinois, with your employer to take advantage of the agreement. This form tells your employer that you`re not a resident of Illinois and, therefore, don`t have to pay Illinois taxes.
It`s worth noting that not all income types are covered by Illinois reciprocity agreements. For example, if you`re a resident of Iowa working in Illinois but earning income from a rental property located in Illinois, you`ll have to pay Illinois state taxes on that income. Similarly, if you`re an Illinois resident working in any of the four states, you`ll have to pay taxes to both states.
Reciprocity agreements can also have a considerable impact on employment. Suppose you`re an employer in Illinois and hire employees who are residents of Iowa, Kentucky, Michigan, or Wisconsin. In that case, you`ll need to register with the Illinois Department of Revenue to withhold taxes to the employee`s state of residence.
It`s essential to stay up-to-date on the latest developments regarding Illinois reciprocity agreements. In 2019, for example, the Illinois Department of Revenue terminated its reciprocity agreement with the state of Missouri, meaning that residents of Missouri working in Illinois would have to pay Illinois state taxes.
In conclusion, understanding the rules and implications of Illinois reciprocity agreements is critical if you`re a resident of one of the four states mentioned above working in Illinois or an employer in Illinois hiring employees from these states. Be sure to consult with a tax professional or the Illinois Department of Revenue if you have any questions or concerns.