A resident of a reciprocal state working in Michigan is not subject to Michigan tax or Michigan withholding. Your employee must complete Form IL-W-4, Employee's Illinois.Withholding Allowance Certificate. The bad thing is is that there will be a penalty for underpaying Illinois income tax as no tax was withheld. Employees must fill out and notarize a form exempting them from withholding in their work state. Employers are expected to withhold state income tax from an employee's wages if that employee is subject to state income tax unless noted below. The laws of the two states where you live and work will determine how you file taxes if you don't live in the state where you work. A Michigan resident can file a withholding form with an employer in a reciprocal state to claim exemption from that state's income tax withholding. Employee lives in Illinois and works fully remote in a city in Michigan that has a local city tax. Is Illinois or Michigan income tax appropriate to withhold?