What actually happens
An employee who lives in Minnesota and performs work in North Dakota sits in two tax systems at once. The residence state claims the right to tax all of a resident's income wherever earned; the work state claims the right to tax income sourced within its borders. North Dakota and Minnesota resolved that overlap by agreement: the work state gives up its claim on commuters' wages entirely.
The certificate is not optional
Reciprocity does not apply automatically because the employee's address is in Minnesota. It applies when the employee gives you a signed NDW-R (Reciprocity Exemption from Withholding for Qualifying Minnesota and Montana Residents Working in North Dakota). Until that form is in your hands you are required to withhold North Dakota tax, and an auditor will ask to see it. The form stays in your records; it is not filed with the state.
Download NDW-R from North Dakota
Unemployment insurance goes to one state only
Income tax can be split between states. Unemployment insurance cannot. Under the localization test used by every state, an employee whose services are performed entirely in North Dakota is covered by North Dakota for unemployment purposes, and all wages are reported there — regardless of where they live, where you are headquartered, or which state's income tax you withhold. North Dakota's 2026 taxable wage base is $46,600. The four-factor test in order.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Minnesota | Minnesota Department of Revenue |
| Unemployment insurance | North Dakota | North Dakota Job Service |
Frequently asked
Do North Dakota and Minnesota have a reciprocal tax agreement?
Yes. North Dakota exempts Minnesota residents from North Dakota income tax withholding on wages, provided the employee files NDW-R with their employer. Without that form on file the employer must still withhold North Dakota tax.
Which state's income tax should be withheld?
Minnesota. Under the agreement the wages are taxable only by the state of residence, so you withhold Minnesota tax and stop withholding North Dakota tax once the certificate is filed.
Which state gets the unemployment insurance wages?
North Dakota. Unemployment coverage is never split between states for a single job. The localization test assigns the whole job to the state where services are performed, which here is North Dakota, regardless of residence or where the employer is headquartered.