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Payroll Today

Reciprocity’s back on: New Jersey and Pennsylvania make peace

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Alice Gilman

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in Payroll Today

A couple of months ago, we reported that New Jersey Gov. Chris Christie had notified Pennsylvania that he was scrapping the 40-year-old income tax withholding reciprocity agreement between the two states, primarily because he needed to close a $250 million budget shortfall without raising taxes.

Never mind.

Apparently, the ginormous hole in New Jersey’s budget has been filled, and the reciprocity agreement will continue. For commuters and their employers, this is welcome relief.

Just-in-time reprieve

Reciprocity benefits employees who live in one state, but who work in another. Normally, two states—employees’ work states and residence states—can take a bite out of a paycheck. State reciprocity agreements permit commuters to pay taxes only to their states of residence. Their out-of-state employers withhold their home state’s income taxes.

Had New Jersey followed through with its intention to scrap the agreement, it would have become effective with the first pay period of 2017, just weeks away. Now everything is back to the status quo ante.

New Jersey employers: Tell your employees who reside in Pennsylvania that they are still only subject to Pennsylvania income taxes. Ensure that their Forms 165 are up-to-date. If they’ve provided you with updated W-4s or NJ-W4 forms, in anticipation of owing income taxes to both states, they may want to revisit those decisions. Tell them they should do so soon.

Pennsylvania employers: Likewise, if you’re a Pennsylvania employer, tell employees who live in New Jersey they will only be subject to New Jersey income taxes. Ensure that their REV419 EX forms are up-to-date. And if they’ve provided you with updated W-4s (Pennsylvania doesn’t have a state form equivalent to the W-4), they may want to refile those forms with you.

New Jersey residents who work in Pennsylvania are, however, still subject to local Pennsylvania taxes. Local taxes must be taken account when Pennsylvania employers determine these employees’ New Jersey income tax withholding.

Upshot: If a local tax exceeds New Jersey’s state tax, and an employee works only within that municipality, there are no New Jersey taxes to withhold.

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