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Multi-state Withholding

Overview

Manage payroll for employers operating in multiple states and employees working across state lines. ProPay supports state tax reciprocal agreements, allowing employees to pay income taxes only to their state of residence when applicable.

Multi-state Employer Setup

If an employer operates in more than one state or needs to withhold taxes for multiple states:

  1. Go to Employer > Employer Setup > Screen 5
  2. Add up to 4 additional states (for a total of 5 states per employer)

State Tax Reciprocal Agreements

State tax reciprocal agreements help employees avoid double taxation when working in one state but living in another.

Key points

  • Most states require income tax on all income earned within the state, including by non-residents
  • Reciprocal agreements allow employees to pay income taxes only to their state of residence
  • Employees can file a form to claim exemption from withholding in the work state
  • Employers may choose to withhold taxes for the employee's state of residence, even if not mandatory

Single State Withholding

To set up withholding for one state:

  1. Go to Employees > Add or Change and select the employee.
  2. Select the appropriate tax state for the employee

Two-state Withholding

For employees subject to withholding from two states or voluntarily withholding from a second state:

  1. Go to Employees > Add or Change and select the employee.
  2. Click TaxStatus/Exempt
  3. Fill in the following fields:
    • Select additional withholding state (if applicable)
    • Withhold this percent of gross
    • Plus this fixed amount

    You may enter either a percent, a fixed amount, or both.

    Reciprocal Agreement State List

    The following states have reciprocal tax agreements (as of September 2025):

    District of Columbia

    • Agreement with: All states except District of Columbia
    • Form: D-4A

    Illinois

    • Agreement with: Iowa, Kentucky, Michigan, Wisconsin
    • Form: IL-W-5-NR

    Indiana

    • Agreement with: Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
    • Form: WH-47

    Iowa

    • Agreement with: Illinois
    • Form: 44-016

    Kentucky

    • Agreement with: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
    • Form: 42A809

    Maryland

    • Agreement with: District of Columbia, Pennsylvania, Virginia, West Virginia
    • Form: MW507

    Michigan

    • Agreement with: Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
    • Form: MI-W4

    Minnesota

    • Agreement with: Michigan, North Dakota
    • Form: MWR

    Montana

    • Agreement with: North Dakota
    • Form: MW-4

    New Jersey

    • Agreement with: Pennsylvania
    • Form: NJ-165

    North Dakota

    • Agreement with: Minnesota, Montana
    • Form: NDW-R

    Ohio

    • Agreement with: Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
    • Form: IT-4NR

    Pennsylvania

    • Agreement with: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
    • Form: REV-419

    Virginia

    • Agreement with: District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
    • Form: VA-4

    West Virginia

    • Agreement with: Kentucky, Maryland, Ohio, Pennsylvania, Virginia
    • Form: WV/IT-104 r

    Wisconsin

    • Agreement with: Illinois, Indiana, Kentucky, Michigan
    • Form: W-220

    Troubleshooting

    Unable to add additional states for an employer

    1. Ensure you are on Employer > Employer Setup > Screen 5
    2. Verify you have not exceeded the maximum of 5 states per employer
    3. Check your user permissions to confirm you have rights to modify employer settings

    Employee's tax withholding is incorrect

    1. Go to Employees > Add or Change, select the employee, and verify the correct tax state is selected.
    2. For two-state withholding, verify that the additional withholding state and percentages/amounts are correctly entered

    Reciprocal agreement form not accepted

    1. Confirm the form is the most current version for the relevant state
    2. Ensure all required fields on the form are completed accurately
    3. Verify that the states involved have a valid reciprocal agreement in place

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