Pennsylvania-New Jersey Reciprocity: What Cross-Border Workers Must Know

The Pennsylvania-New Jersey reciprocity agreement is one of the most heavily used cross-border tax arrangements in the United States. Signed in 1972, the compact covers roughly 125,000 commuters who cross the Delaware River each workday, and it spares them from the complexity of filing two state returns. But the agreement has important limits: it does not cover Philadelphia's wage tax, Pennsylvania's local earned income tax, or New Jersey's convenience-of-the-employer rule for remote work. Understanding these layers is essential for anyone who lives on one side of the river and works on the other.

This guide explains the PA-NJ reciprocity agreement, the NJ-165 form, the local tax complications, and the political history that nearly ended the agreement in 2016. We cite the Pennsylvania Department of Revenue, the New Jersey Division of Taxation, the City of Philadelphia Revenue Department, and the official text of the agreement throughout. Use the worked examples to verify your own situation, then run your numbers through our calculator.

The PA-NJ reciprocity agreement

The Pennsylvania-New Jersey reciprocity agreement was signed by the tax administrators of both states on September 2, 1972, and is codified in Section 4 of New Jersey's Gross Income Tax Act (N.J.S.A. 54A:5-8) and in the Pennsylvania Tax Reform Code through reciprocal authorization language. The agreement provides that compensation paid by an employer in one state to a resident of the other state is exempt from withholding and from income tax in the work state.

The compact is one of the most heavily used in the country for two reasons. First, the labor market in greater Philadelphia is intensely cross-border: tens of thousands of New Jersey residents commute to Philadelphia and its Pennsylvania suburbs, and a comparable number of Pennsylvania residents commute to jobs in Camden, Trenton, and other New Jersey employment centers. Second, the tax differential between the two states is significant. Pennsylvania levies a flat 3.07% state income tax, while New Jersey levies graduated rates from 1.4% to 10.75% for 2025, with the top rate applying to income over $1 million.

Without reciprocity, a New Jersey resident working in Pennsylvania would pay Pennsylvania's 3.07% on those wages, file a non-resident Pennsylvania return, and then claim a credit on their New Jersey return for the Pennsylvania tax paid. Because New Jersey's top rate far exceeds 3.07%, the credit would rarely cover the full New Jersey liability, leaving the worker with a balance due. Reciprocity eliminates this problem by sourcing the wages to New Jersey only, where they are taxed at New Jersey's higher rates.

The NJ-165 form

New Jersey residents claiming exemption from Pennsylvania withholding file Form NJ-165, the Certificate of Non-Residence in Pennsylvania, with their Pennsylvania employer. The form, published by the New Jersey Division of Taxation, requires the employee to certify their New Jersey residency and to attest that they are claiming exemption from Pennsylvania withholding under the reciprocity agreement.

The NJ-165 is filed with the employer's payroll department, not with the New Jersey Division of Taxation directly. The employer must retain the form on file for the duration of employment. Once the form is on file, the employer stops withholding Pennsylvania state income tax. If the employer has New Jersey payroll registration, the employer begins withholding New Jersey state income tax based on the employee's NJ-W4 form. If the employer does not have New Jersey registration, the employee is responsible for making New Jersey estimated tax payments on Form NJ-1040-ES.

Pennsylvania residents claiming exemption from New Jersey withholding follow a mirror process. They file Form REV-419 with their New Jersey employer, certifying Pennsylvania residency. The New Jersey employer stops withholding New Jersey income tax, and the Pennsylvania employer (or the employee through estimated payments) handles Pennsylvania's 3.07% flat tax.

The convenience rule complication for New Jersey

New Jersey, unlike most states, applies a convenience-of-the-employer test to non-resident employees of New Jersey employers who work remotely. Under New Jersey Administrative Code 18:35-5.1, if a non-resident performs services for a New Jersey employer from outside New Jersey for the employer's necessity — for example, because the employer requires the employee to work at a client site in another state — the wages are not New Jersey-source income. But if the employee works remotely for their own convenience, the wages remain New Jersey-source income and are subject to New Jersey tax.

This convenience rule is separate from reciprocity and creates a wrinkle for Pennsylvania residents who telework for New Jersey employers. A Pennsylvania resident who teleworks from home in Philadelphia for a New Jersey employer, for their own convenience, owes New Jersey tax on those telework wages — reciprocity does not apply because the work was performed in Pennsylvania, not New Jersey. The Pennsylvania resident would then file a non-resident New Jersey return and claim a credit on their Pennsylvania return.

The convenience rule gained prominence during the pandemic, when many workers relocated out of state but continued working for New York or New Jersey employers. New Jersey issued guidance in 2021 confirming that the convenience rule would apply once emergency telework orders lapsed. As of 2025, New Jersey continues to enforce the convenience rule for non-resident employees, though it does not apply to residents of reciprocity states who physically work in New Jersey.

PA's local Earned Income Tax (EIT)

Pennsylvania is one of the few states that allows local jurisdictions to levy an earned income tax (EIT) on top of the 3.07% state flat tax. Under Act 32 of 2008, each Pennsylvania county has a single tax collector responsible for administering EIT for all municipalities and school districts within the county. EIT rates vary by jurisdiction and typically range from 0.5% to 3.0%, with most falling between 1.0% and 2.0%.

The EIT applies to Pennsylvania residents regardless of where their wages are sourced. A Pennsylvania resident working in New Jersey under reciprocity still owes their home jurisdiction's EIT on those wages. The local tax collector administers the EIT, and the employer — if registered with the appropriate collector — withholds it alongside any state tax. If the New Jersey employer is not registered with the Pennsylvania collector, the Pennsylvania resident must make EIT estimated payments or face a year-end balance due.

The EIT also applies to non-residents who work in a Pennsylvania jurisdiction that levies the tax, unless the non-resident's home jurisdiction imposes an equivalent or higher rate and credits the Pennsylvania EIT. This is called the "non-resident EIT" and is most relevant to New Jersey residents working in Pennsylvania suburbs outside Philadelphia. Philadelphia itself, however, has its own separate wage tax that is not part of the Act 32 EIT system.

Philadelphia's wage tax

Philadelphia levies its own wage tax, which is one of the highest local wage taxes in the country. For 2025, the City of Philadelphia Revenue Department sets the rate at 3.75% for residents and 3.44% for non-residents. The wage tax applies to wages earned within the city, regardless of the employee's state of residence, and is collected through employer withholding.

Philadelphia's wage tax is structurally separate from the Pennsylvania state income tax and from the Act 32 EIT system. Reciprocity between Pennsylvania and New Jersey does not extend to the Philadelphia wage tax. A New Jersey resident working in Philadelphia pays the 3.44% non-resident wage tax, in addition to New Jersey state income tax on those same wages (because reciprocity exempts them from Pennsylvania state tax but not from the Philadelphia local tax). The Pennsylvania Department of Revenue notes that the wage tax is a local levy imposed under the authority of the City of Philadelphia Home Rule Charter.

This dual tax structure — New Jersey state tax plus Philadelphia wage tax — is a frequent source of confusion for New Jersey commuters to Philadelphia. The total effective rate can approach 9% for a high-earning New Jersey resident, with New Jersey's marginal rate of 6.37% applying to income between $80,000 and $150,000 and Philadelphia's 3.44% layered on top. Workers should plan their withholding accordingly and verify that both New Jersey and Philadelphia tax are being withheld from each paycheck.

Worked examples

Example 1: New Jersey resident commuting to Philadelphia. A software engineer lives in Cherry Hill, New Jersey, and works in Center City Philadelphia. She files Form NJ-165 with her Pennsylvania employer, claiming exemption from Pennsylvania's 3.07% state income tax under reciprocity. The employer withholds no Pennsylvania state income tax but does withhold Philadelphia's 3.44% non-resident wage tax. New Jersey state income tax is withheld through the employer's New Jersey payroll registration, based on her NJ-W4. At year-end, she files New Jersey Form NJ-1040 reporting all wages, and she does not file a Pennsylvania state return. She may need to file a Philadelphia wage tax reconciliation if any local withholding is incorrect.

Example 2: Pennsylvania resident working in New Jersey. A pharmacist lives in Morrisville, Pennsylvania, and commutes to a pharmacy in Trenton, New Jersey. He files Form REV-419 with his New Jersey employer, claiming exemption from New Jersey state income tax under reciprocity. The New Jersey employer withholds no New Jersey state income tax. Pennsylvania's 3.07% flat tax is withheld through the employer's Pennsylvania payroll registration, along with the local EIT for his home jurisdiction in Bucks County (typically 1.0%). At year-end, he files Pennsylvania Form PA-40 and reports the wages; he does not file a New Jersey state return.

Recent guidance on remote work and the PA-NJ agreement

The pandemic raised a series of questions about PA-NJ reciprocity and remote work. The New Jersey Division of Taxation and the Pennsylvania Department of Revenue both issued guidance in 2020 confirming that the reciprocity agreement continues to apply when an employee works remotely in their state of residence for an employer located in the other state. A New Jersey resident teleworking from New Jersey for a Pennsylvania employer remains exempt from Pennsylvania state tax, and a Pennsylvania resident teleworking from Pennsylvania for a New Jersey employer remains exempt from New Jersey state tax.

The New Jersey convenience rule, however, complicates the picture for Pennsylvania residents who choose to work remotely from outside Pennsylvania. If a Pennsylvania resident teleworks from a third state (say, Delaware) for a New Jersey employer, neither reciprocity nor the convenience rule clearly applies. The Pennsylvania resident should consult a tax professional to determine sourcing. The Pennsylvania Department of Revenue issued guidance in 2022 confirming that wages are sourced to the state where the work is physically performed, and that reciprocity applies only when that state is the employee's state of residence.

For hybrid arrangements — three days in the office, two days teleworking from home in the residence state — both states have informally indicated that reciprocity applies to the full wage, provided the residence state is where the employee lives. This is consistent with the long-standing administrative practice of treating the residence state as the default sourcing jurisdiction for reciprocity-eligible employees.

What happens if PA-NJ reciprocity is ever terminated

The PA-NJ reciprocity agreement has been politically controversial at times. The most serious threat came in 2016, when New Jersey Governor Chris Christie threatened to terminate the agreement effective January 1, 2017. Christie's stated rationale was that New Jersey was losing revenue because New Jersey residents working in Pennsylvania paid Pennsylvania's then-3.07% flat rate, which was lower than New Jersey's graduated rates. Christie wanted Pennsylvania to share in the revenue or to negotiate a new arrangement.

Had the termination proceeded, roughly 125,000 cross-border workers would have faced filing two state returns, and many would have owed significant year-end balances due because Pennsylvania withholding would no longer cover their full New Jersey liability. The political backlash was intense — both business groups and labor unions opposed the termination — and Governor Christie ultimately reversed course in November 2016, days before the termination would have taken effect.

The episode remains a cautionary tale. The reciprocity agreement is a bilateral instrument that either state can terminate with notice, and the political incentives to do so can shift. Pennsylvania's flat 3.07% rate and New Jersey's high top rate mean that any future fiscal pressure on New Jersey could revive the termination threat. Workers who rely on reciprocity should keep records of their filings and be prepared to switch to the credit mechanism if the agreement is ever terminated.

Common mistakes

The most common mistake in PA-NJ reciprocity is overlooking Philadelphia's wage tax. New Jersey residents who work in Philadelphia sometimes assume reciprocity eliminates all Pennsylvania tax, when in fact only the state portion is eliminated. The 3.44% non-resident wage tax still applies and must be withheld.

Second is overlooking the Pennsylvania EIT for Pennsylvania residents working in New Jersey. Act 32 EIT applies to Pennsylvania residents regardless of where they work, and the New Jersey employer may not be registered with the appropriate Pennsylvania tax collector. Pennsylvania residents in this situation should make EIT estimated payments or face year-end penalties.

Third is misunderstanding the New Jersey convenience rule for remote work. Pennsylvania residents who telework for New Jersey employers from a third state — or from Pennsylvania for their own convenience — may owe New Jersey tax on those wages. Reciprocity does not apply because the work was not performed in New Jersey.

Fourth is failing to file a new exemption form after moving. A New Jersey resident who relocates to Pennsylvania must file Form REV-419 with their Pennsylvania employer within 10 days. The reciprocity arrangement reverses direction, and the employer must update withholding accordingly.

Fifth is assuming reciprocity covers severance, deferred compensation, or other post-employment payments. Reciprocity covers wages paid during active employment; other payments may be sourced differently. Workers receiving unusual compensation should consult a tax professional.

What to do next

Pull your most recent pay stub and identify which state and local taxes are being withheld. If you are a New Jersey resident working in Pennsylvania and see Pennsylvania state income tax withholding, file Form NJ-165 with your employer immediately. If you are a Pennsylvania resident working in New Jersey and see New Jersey state income tax withholding, file Form REV-419. New Jersey residents in Philadelphia should verify that the Philadelphia wage tax is being withheld at the non-resident rate. Pennsylvania residents working in New Jersey should confirm that their local EIT is being withheld or that estimated payments are being made. Run your full-year numbers through our calculator to project your liability under reciprocity, then adjust your W-4 or estimated payments to close any shortfall before year-end.