Work in New Jersey, Live in Pennsylvania: Tax Reciprocity

Step by step

How do I claim the NJ-PA reciprocity exemption?

The process is straightforward and takes effect at the payroll level:

1. Obtain Form NJ-165 from the New Jersey Division of Taxation website or your employer's HR department. The form's official title is "Employee's Certificate of Non-Residence in New Jersey."
2. Complete the form by certifying that you are a legal resident of Pennsylvania and that your NJ income consists solely of wages, salaries, tips or commissions.
3. Submit NJ-165 to your employer's payroll department. Once processed, your employer stops withholding NJ income tax and begins withholding PA income tax instead.
4. File your PA-40 resident return at tax time. Report all income including NJ wages. Since PA tax was already withheld, the filing is the same as if you worked in Pennsylvania.

You do not need to file a New Jersey nonresident return (NJ-1040NR) for wage income once reciprocity withholding is set up correctly.

What types of income does the reciprocity agreement cover?

The NJ-PA reciprocity agreement covers wages, salaries, tips and commissions — compensation you earn as an employee. It does not cover:

• Business or self-employment income earned in NJ
• Rental income from NJ property
• Partnership or S-corporation income sourced to NJ
• Gambling winnings from NJ casinos or lottery
• Interest, dividends or capital gains

If you have non-wage NJ-source income, you may still need to file NJ-1040NR for that portion, even with reciprocity in place for your wages.

What if my employer already withheld NJ tax by mistake?

This happens more often than you would expect, especially with a new job or when payroll systems default to work-state withholding. The fix is a two-step process:

1. File NJ-165 immediately so your employer corrects future paychecks.
2. File NJ-1040NR at year-end showing zero NJ tax liability and claiming a full refund of the NJ withholding. Attach your W-2 showing the NJ wages and withholding.

You will also need to file your PA return and may owe PA tax on the income that was incorrectly withheld for NJ, since PA tax was not collected during the year. To avoid this cash-flow surprise, correct the withholding as early as possible.

How does the PA flat tax compare to NJ's graduated brackets?

Pennsylvania levies a flat-rate income tax on all taxable income. New Jersey, by contrast, uses graduated brackets with rates that climb as income rises. For most workers, PA's flat rate is lower than the marginal NJ rate they would face, especially at moderate-to-high incomes. This makes the reciprocity agreement financially favorable for PA residents — you pay the lower PA flat rate instead of the higher NJ graduated rate.

At very low incomes, NJ's lowest bracket rate can be close to or below PA's flat rate, so the advantage narrows. But the simplicity of a single flat-rate filing with no dual-state paperwork is a benefit at every income level.

For a detailed breakdown of what you take home in each state, compare the Pennsylvania salary calculator with the New Jersey salary calculator.

Does reciprocity affect local or municipal taxes?

The NJ-PA reciprocity agreement covers state-level income tax only. Pennsylvania has local earned income taxes (EIT) levied by municipalities and school districts. As a PA resident, you owe your local EIT to your home municipality regardless of where you work. This is not affected by the reciprocity agreement — it is a PA local tax obligation.

New Jersey does not have a local income tax, so there is no NJ municipal layer to worry about. But your PA local EIT can range from around 1% to over 3% depending on your municipality, so factor it into your take-home calculations.

What about the reverse direction — NJ residents working in PA?

The reciprocity works both ways. If you live in New Jersey and work in Pennsylvania, you file REV-419 with your PA employer to exempt from PA withholding and pay only NJ tax. We cover this in detail on our work in PA, live in NJ guide.