Employee works in Kentucky, lives in Illinois a reciprocal state.
How do you enter this in their payroll tax withholdings ?
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if they filed form Kentucky 42A809 with their employer, only Illinois withholding should have been taken.
the IL-941 should be filed to reflect the Illinois wages and withholding. on their w-2 the state portion wouls only show Illinois amounts.
if they didn't then likely they would have to be treated as a Kentucky resident for withholding purposes.
IL has a reciprocal agreement, on wages, with KY. No KY state taxes are withheld or due and you do not need to file a KY return.
However the reciprocity agreement does not apply to local city or county income taxes. You are not required to file a local return, but you are also not entitled to a refund of the city or county withholding (box19 on your W-2), unless there was an error in the amount. IL will give you a credit for any local KY tax paid/withheld.
Here's a link to the Kentucky form @Mike9241 referred to. You must file this form with your KY employer to prevent KY taxes from being withheld from your pay.
Your employer may or may not be willing to withhold Illinois taxes for you. If Illinois taxes are not withheld from your pay, then you must make quarterly estimated tax payments to Illinois to prevent penalties from being imposed.
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