Why are tips in paychecks taxed?
Illinois has a reciprocal tax treaty with four neighboring states: Iowa, Kentucky, Michigan, and Wisconsin. These are income taxes for those who work in one state but live in another. Residents only pay income tax to their home state regardless of where they work.
What is a mutual agreement?
Many states in the US have reciprocal agreements, sometimes called tax reciprocity, with neighboring states.
Usually anyone who earns an income in a particular state has to pay taxes there. This can result in employees being taxed twice if they actually live elsewhere - once in the states in which they work (for income generated there), then again in their home states, where they have to repay for the total income generated.
Some states allow taxpayers to credit income taxes paid to another state, and some have reciprocal arrangements. The worker is only taxed in the state in which he lives. Employers should not withhold state taxes, but they are not required to withhold taxes for the state in which the employee lives. This can result in tax owed - rather than a refund - on tax time, so many workers voluntarily make estimated quarterly payments to their own states to be on the safe side.
Live in Illinois and work in another state
An Illinois resident who works in Iowa, Kentucky, Michigan, or Wisconsin only needs to pay Illinois income tax.
These neighboring states do not tax the wages of Illinois residents who work in their jurisdictions.
You are eligible for a refund if you are a resident of Illinois and have withheld taxes from your paycheck for those states. You cannot withhold credit for taxes withheld from these states on your Illinois return.
Live in another state and work in Illinois
You are not subject to Illinois income tax on wages, salaries, tips, or commissions received from Illinois employers if you are a resident of Iowa, Kentucky, Michigan, or Wisconsin. However, this does not apply to any other income generated in Illinois such as lottery winnings.
What to do when you are in a reciprocity state
Life? Form IL-W-5NR "Illinois Declaration of Non-Residence" with the state of Illinois to certify that you live in one of the four reciprocal states. If you are leaving your current residence and settling in Illinois You have 10 days to notify the state by filing the IL-W-5 Certificate of Residence in Illinois. "
If you withheld Illinois tax from your paycheck, you can claim a refund by filing an Illinois tax return, Form IL-1040, and Schedule NR for non-residents.
NOTE: State laws are subject to change and the information above may not reflect the latest changes; please check with the tax authority of the state you work in to ensure that there is still a mutual agreement between that state and your home state . The information contained in this article is not intended as tax advice and is not a substitute for tax advice.
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