diff --git a/mage/main.go b/mage/main.go
index 0a50da6d..0062bd35 100644
--- a/mage/main.go
+++ b/mage/main.go
@@ -127,7 +127,7 @@ const MagefilesDirName = "magefiles"
 
 // UsesMagefiles returns true if we are getting our mage files from a magefiles directory.
 func (i Invocation) UsesMagefiles() bool {
-	return i.Dir == MagefilesDirName
+	return filepath.Base(i.Dir) == MagefilesDirName
 }
 
 // ParseAndRun parses the command line, and then compiles and runs the mage
@@ -316,34 +316,29 @@ func Invoke(inv Invocation) int {
 	if inv.GoCmd == "" {
 		inv.GoCmd = "go"
 	}
-	var noDir bool
 	if inv.Dir == "" {
-		noDir = true
 		inv.Dir = dotDirectory
-		// . will be default unless we find a mage folder.
-		mfSt, err := os.Stat(MagefilesDirName)
-		if err == nil {
-			if mfSt.IsDir() {
-				stderrBuf := &bytes.Buffer{}
-				inv.Dir = MagefilesDirName // preemptive assignment
-				// TODO: Remove this fallback and the above Magefiles invocation when the bw compatibility is removed.
-				files, err := Magefiles(dotDirectory, inv.GOOS, inv.GOARCH, inv.GoCmd, stderrBuf, false, inv.Debug)
-				if err == nil {
-					if len(files) != 0 {
-						errlog.Println("[WARNING] You have both a magefiles directory and mage files in the " +
-							"current directory, in future versions the files will be ignored in favor of the directory")
-						inv.Dir = dotDirectory
-					}
-				}
-			}
-		}
 	}
-
 	if inv.WorkDir == "" {
-		if noDir {
-			inv.WorkDir = dotDirectory
-		} else {
-			inv.WorkDir = inv.Dir
+		inv.WorkDir = inv.Dir
+	}
+	magefilesDir := filepath.Join(inv.Dir, MagefilesDirName)
+	// . will be default unless we find a mage folder.
+	mfSt, err := os.Stat(magefilesDir)
+	if err == nil {
+		if mfSt.IsDir() {
+			stderrBuf := &bytes.Buffer{}
+			originalDir := inv.Dir
+			inv.Dir = magefilesDir // preemptive assignment
+			// TODO: Remove this fallback and the above Magefiles invocation when the bw compatibility is removed.
+			files, err := Magefiles(originalDir, inv.GOOS, inv.GOARCH, inv.GoCmd, stderrBuf, false, inv.Debug)
+			if err == nil {
+				if len(files) != 0 {
+					errlog.Println("[WARNING] You have both a magefiles directory and mage files in the " +
+						"current directory, in future versions the files will be ignored in favor of the directory")
+					inv.Dir = originalDir
+				}
+			}
 		}
 	}
 
diff --git a/mage/main_test.go b/mage/main_test.go
index 4ea4d0b1..b722d842 100644
--- a/mage/main_test.go
+++ b/mage/main_test.go
@@ -477,6 +477,28 @@ func TestMixedTaggingMagefilesFolder(t *testing.T) {
 	}
 }
 
+func TestSetDirWithMagefilesFolder(t *testing.T) {
+	resetTerm()
+
+	stderr := &bytes.Buffer{}
+	stdout := &bytes.Buffer{}
+	inv := Invocation{
+		Dir:    "testdata/setdir_with_magefiles_folder",
+		Stdout: stdout,
+		Stderr: stderr,
+		List:   true,
+	}
+	code := Invoke(inv)
+	if code != 0 {
+		t.Errorf("expected to exit with code 0, but got %v, stderr: %s", code, stderr)
+	}
+	expected := "Targets:\n  build    \n"
+	actual := stdout.String()
+	if actual != expected {
+		t.Fatalf("expected %q but got %q", expected, actual)
+	}
+}
+
 func TestGoRun(t *testing.T) {
 	c := exec.Command("go", "run", "main.go")
 	c.Dir = "./testdata"
diff --git a/mage/testdata/setdir_with_magefiles_folder/magefiles/mage_helpers.go b/mage/testdata/setdir_with_magefiles_folder/magefiles/mage_helpers.go
new file mode 100644
index 00000000..e4b8872f
--- /dev/null
+++ b/mage/testdata/setdir_with_magefiles_folder/magefiles/mage_helpers.go
@@ -0,0 +1,6 @@
+//go:build mage
+// +build mage
+
+package main
+
+func foo() {}
diff --git a/mage/testdata/setdir_with_magefiles_folder/magefiles/magefile.go b/mage/testdata/setdir_with_magefiles_folder/magefiles/magefile.go
new file mode 100644
index 00000000..63584509
--- /dev/null
+++ b/mage/testdata/setdir_with_magefiles_folder/magefiles/magefile.go
@@ -0,0 +1,6 @@
+//go:build mage
+// +build mage
+
+package main
+
+func Build() {}