Pennsylvania and New Jersey have a reciprocal agreement covering individual income tax on compensation. If you live in Pennsylvania and work for an employer in New Jersey, the employer is not required to withhold income tax for New Jersey, but should instead withhold Pennsylvania tax. This agreement only covers earnings from compensation. If you are self-employed, your income is taxable where it is earned: so, any New Jersey source income would be subject to New Jersey individual income tax.
You should file a Pennsylvania state (and, if required, local) income tax return reporting all your income and claiming the credit for withholding on your W-2. If for some reason your employer has incorrectly withheld New Jersey tax, you should file a New Jersey return to acquire a refund of the tax and pay the full balance due on your Pennsylvania return.
When it comes to taxes, working and living in different states can make things quite complex. To ensure you are filing correctly consult your local CPA. Don’t have a CPA? Visit PICPA’s consumer page
for resources including a CPA Locator tool
Answer By: Susan E. S. Howe, CPA, is principal of HoweAdvisory in Strafford.