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What does tax reciprocity mean for North Dakota’s remote workers?

On Behalf of | Oct 4, 2023 | Business Law

Income tax reciprocity is an agreement between the two states that helps workers avoid being taxed twice on the same income. This could be a cause for concern for someone who lives in North Dakota but works for a company based in Minnesota. Typically, they might have to pay income taxes to both states: North Dakota because they live there and Minnesota because that is where they work.

However, because North Dakota and Minnesota have a tax reciprocity agreement, workers only have to pay income taxes to their resident state. In this case, that state would be North Dakota. The company they work for should withhold income tax for North Dakota, not Minnesota.

Its impact on businesses

So, how does this agreement affect North Dakota businesses shifting from working in an office to working from home? One of the important things companies need to do is correctly organize documents to meet regulatory rules. This includes making sure they manage taxes for employees properly.

In light of this agreement, companies will need to adjust the following for their employees, depending on their situation:

  • For North Dakota businesses with North Dakota residents as employees: There’s not much change. Employees live and work in North Dakota, so they will continue to pay North Dakota income taxes.
  • For North Dakota businesses with employees who live in Minnesota: If a business’s employees live in Minnesota but have been commuting to North Dakota for work, they must pay income taxes only to Minnesota. Even in a work-from-home setup, they will keep paying Minnesota income taxes.
  • For North Dakota businesses with employees who live in other states: If employees live in states that do not have a reciprocity agreement with North Dakota, things could get complicated. They might have to pay income taxes to both their home state and North Dakota unless their home state offers them credit for taxes paid to North Dakota. In such cases, it could be best for the business to consult a legal professional to know its legal implications.

While businesses must correctly withhold income taxes for their employees, the reciprocity agreements mainly affect employees’ income taxes. The agreement does not cover other taxes a business must pay, like corporate or sales taxes. Nonetheless, companies must educate themselves about these changes and how they could impact their operations.