I live in New Jersey but work in Philadelphia. In 2014, I paid roughly $1,300 in New Jersey state taxes and $1,700 in Pennsylvania -non-resident taxes from my payroll checks. I am getting roughly $1,250 back from the state of New Jersey. This year, 2015, my employer has removed the Pennsylvania -non-resident tax deduction from our payroll, explaining that the New Jersey state tax that is withheld will cover/compensate the Pennsylvania/Philadelphia wage tax. Is this correct? I have a bad feeling that at the end of the year I will owe money to the city of Philadelphia.
Your employer is correct. There is reciprocity between Pennsylvania and New Jersey. What this means is if you reside in New Jersey, but work in Pennsylvania, you only need to have New Jersey taxes withheld. According to the New Jersey Division of Taxation:
“Under the Reciprocal Tax Agreement, the compensation derived by residents of either state (New Jersey or Pennsylvania) will be subject to income tax only in the state of residence including compensation income derived from sources within the other state.”
However, the reciprocal agreement does not include any wage tax imposed by a political subdivision of the Commonwealth of Pennsylvania. If you are employed solely in Philadelphia, I would recommend that you confirm the withholding policy of your company since Philadelphia Wage Tax is greater than the New Jersey income tax otherwise required to be withheld for employees. Taxes can be complicated when living and working in different jurisdictions. You may want to meet with a CPA to review your specific tax situation so that there are no surprises at the end of the year. If you do not have a CPA, you can find one using PICPA’s CPA Locator.
Answer By: Carlo J. Silvesti, CPA, is an assistant professor of accounting with Gwynedd Mercy University in Gwynedd Valley.
***Answer originally published April 1, 2015