Does Maryland Have Reciprocity With Pennsylvania for Taxes?

Understanding tax reciprocity agreements is important for residents who live and work across state borders, as it can affect their tax obligations. Maryland and Pennsylvania are neighboring states with many individuals commuting between them for employment. The presence or absence of a tax reciprocity agreement between these states significantly influences the tax filing process and income tax withholding from paychecks.

Existing Reciprocity Arrangement

Maryland and Pennsylvania do not have a tax reciprocity agreement. This means individuals residing in one state and working in the other must file tax returns in both states. Maryland residents working in Pennsylvania, and vice versa, are subject to the income tax laws of both states. Maryland requires residents to pay state income tax on all income, regardless of where it is earned, while Pennsylvania imposes a flat income tax rate of 3.07%. Maryland residents working in Pennsylvania must file a non-resident tax return in Pennsylvania and a resident tax return in Maryland. Maryland allows a credit for taxes paid to other states, limited to the Maryland tax attributable to income earned in Pennsylvania, necessitating precise calculations.

This lack of a reciprocity agreement impacts employers as well, requiring them to withhold state taxes based on the employee’s work location. Pennsylvania employers must withhold Pennsylvania income tax for Maryland residents working in Pennsylvania, and Maryland employers must do the same for Pennsylvania residents. This adds complexity to payroll processes and requires accurate record-keeping to comply with both states’ regulations.

Eligibility for Reciprocal Treatment

Without a tax reciprocity agreement, individuals must independently fulfill the tax obligations of both states. Maryland residents working in Pennsylvania must file a non-resident tax return in Pennsylvania while simultaneously filing a resident return in Maryland. Maryland provides a credit for taxes paid to other states, but this credit is limited to the Maryland tax attributable to the Pennsylvania-earned income, requiring careful calculations for accuracy.

Employers must withhold taxes based on the employee’s work location while ensuring compliance with both states’ withholding rules. Failure to withhold correctly can result in penalties, including fines and interest charges.

Tax Withholding Requirements

Tax withholding requirements are particularly complex for individuals who live and work across state lines without a reciprocity agreement. Employers in Maryland are required to withhold state income tax based on the employee’s residency, meaning Maryland residents working in Pennsylvania will have Pennsylvania taxes withheld. Employers must ensure accurate withholding to prevent over- or under-withholding. The Maryland Comptroller’s Office offers guidance for withholding calculations.

In Pennsylvania, employers must withhold state taxes for non-residents, such as Maryland residents, at a flat rate of 3.07% as of 2024. Employers must report and remit these withholdings accurately to the Pennsylvania Department of Revenue.

Employees must communicate their residency status to employers and complete the necessary forms, such as Pennsylvania’s REV-419, to establish their withholding status. Regularly reviewing pay stubs and withholding amounts can help employees ensure accuracy.

Filing Requirements

Filing tax returns when residing in one state and working in another without a reciprocity agreement involves navigating state-specific requirements. Maryland residents employed in Pennsylvania must file a non-resident tax return in Pennsylvania, reporting only income earned in the state. At the same time, they must file a resident tax return in Maryland, reporting their total income and claiming any applicable credits for taxes paid to Pennsylvania using Maryland Form 502.

The differing tax systems—Pennsylvania’s flat tax and Maryland’s graduated tax brackets—require careful calculations to ensure compliance and maximize credits. Accurate record-keeping of income, withholding, and credits claimed is essential for substantiating filings if audited.

Local Tax Considerations

Local taxes add additional complexity for Maryland and Pennsylvania residents. Both states impose local income taxes, but their structures vary.

In Maryland, local income taxes are determined by counties and Baltimore City, with rates ranging from 2.25% to 3.2% as of 2023. These taxes are based on the resident’s county, regardless of where income is earned. Employers are not required to withhold Maryland local taxes for employees working out of state, leaving individuals responsible for accounting for these taxes when filing their returns.

Pennsylvania’s local tax system is governed by municipalities and school districts, with rates varying widely. For instance, Philadelphia imposes a wage tax of 3.79% for residents and 3.44% for non-residents as of 2023. Pennsylvania employers generally withhold local taxes for employees, including non-residents, based on the work location. Maryland residents working in Pennsylvania must address these local tax obligations, which are separate from state-level requirements. Understanding how Pennsylvania’s local taxes interact with Maryland’s tax credits is vital to avoid overpayment and ensure accurate filings.