Governor Chris Christie recently announced that the income tax reciprocity agreement he had planned to suspend with Pennsylvania will be salvaged after finding $200 million in savings from legislation he signed into law to help curb public employee healthcare costs.
Reciprocal income tax withholding agreements between states allow an employer to withhold and remit income taxes for an employee’s state of residence only, and the employee only has to file one income tax return—with the state in which he or she lives.
The governor had previously said the State needed to revoke the reciprocal agreement with Pennsylvania, which had been in place for four decades but was set to expire on January 1, 2017, because of a $250 million budget shortfall. Ending the tax arrangement with Pennsylvania would have impacted nearly a quarter million employees in both states and was estimated to bring $180 million in new revenue to New Jersey, while Pennsylvania stood to lose $5 million a year.
Under the longstanding New Jersey/Pennsylvania reciprocity agreement, a New Jersey resident who works in Pennsylvania files Form REV-419 EX (Employee’s Non-Withholding Application Certificate) with their Pennsylvania employer. This permits the Pennsylvania employer to withhold only New Jersey income taxes from the employee’s pay.
A Pennsylvania resident who works in New Jersey must file New Jersey Form 165 (Employee’s Certificate of Non-Residence) in New Jersey, with his or her New Jersey employer to have only Pennsylvania income taxes withheld.