My Employer Withholds Tax in the Work State by Mistake

If you live in Virginia and work in a reciprocal state—or vice versa—you may be eligible to avoid income tax withholding in the state where you work. However, mistakes can happen, and sometimes employers withhold state income tax from the wrong state, even if you qualify under a tax reciprocity agreement.

So what should you do if your employer mistakenly withholds tax in your work state?

Step 1: File a Nonresident Return to Claim a Refund

If your employer withheld income tax for the state where you work, even though you live in a reciprocal state and were eligible for exemption, you can still get that money back. To do so, you’ll need to file a nonresident income tax return in the work state and claim a refund for the amount that was incorrectly withheld.

Be prepared to include:

• A copy of your W-2 showing the withheld taxes
• Proof of your residency in the reciprocal state (e.g., Virginia)
• The exemption form you should have filed (if available)
• A written explanation or supporting documents, if required by the state

Step 2: File Your Resident Return as Usual

Even if tax was mistakenly withheld by your work state, you must still file your resident income tax return in your home state—such as Virginia. On this return, you will report all income, including what you earned in the other state.

If you do not file a refund claim with the work state, you may be able to claim a credit on your resident return for taxes paid to another state—but this is typically less favorable and more complex than simply obtaining a refund from the work state.

Avoiding the Problem in the Future

To prevent this situation from happening again:

• Submit the proper exemption form to your employer as soon as possible
• Check your pay stubs regularly to verify that the correct state tax is being withheld
• Communicate with your HR or payroll department if something looks off

Bottom Line

Mistaken withholding can be fixed, but it does require extra steps and paperwork. By understanding the process and staying proactive with your employer, you can ensure your state taxes are handled correctly going forward.