What actually happens
An employee who lives in Indiana and performs work in Pennsylvania sits in two tax systems at once. The residence state claims the right to tax all of a resident's income wherever earned; the work state claims the right to tax income sourced within its borders. Pennsylvania and Indiana resolved that overlap by agreement: the work state gives up its claim on commuters' wages entirely.
The certificate is not optional
Reciprocity does not apply automatically because the employee's address is in Indiana. It applies when the employee gives you a signed REV-419 (Employee's Nonwithholding Application Certificate). Until that form is in your hands you are required to withhold Pennsylvania tax, and an auditor will ask to see it. The form stays in your records; it is not filed with the state.
Download REV-419 from Pennsylvania
Pennsylvania's convenience rule changes the answer for remote workers
Pennsylvania applies a convenience-of-the-employer test. If the employee is on a Pennsylvania payroll but works from Indiana because they prefer to, Pennsylvania treats those days as Pennsylvania-source income even though no work was physically performed there. Only genuine employer necessity moves the sourcing. How the test is applied.
Unemployment insurance goes to one state only
Income tax can be split between states. Unemployment insurance cannot. Under the localization test used by every state, an employee whose services are performed entirely in Pennsylvania is covered by Pennsylvania for unemployment purposes, and all wages are reported there — regardless of where they live, where you are headquartered, or which state's income tax you withhold. Pennsylvania's 2026 taxable wage base is $10,000. The four-factor test in order.
Local taxes are a separate problem
Pennsylvania: Roughly 2,470 municipalities and 469 school districts levy an Earned Income Tax (EIT) and/or a Local Services Tax (LST), withheld by employers under Act 32. Philadelphia's Wage Tax is separate from the Act 32 system. CRITICAL: the PA/NJ reciprocal agreement does NOT cover the Philadelphia Wage Tax -- New Jersey residents working in Philadelphia still owe it.
Indiana: EVERY Indiana county imposes a Local Income Tax (LIT), withheld by the employer. CRITICAL: Indiana's reciprocity agreements do NOT cover county LIT -- employers must still withhold county tax from residents of reciprocal states who have a principal place of employment in an Indiana county as of January 1. Employees expecting 30 or fewer Indiana workdays may file Form WH-4AFF to claim a county tax exemption.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Indiana | Indiana Department of Revenue |
| Unemployment insurance | Pennsylvania | Pennsylvania Department of Labor and Industry, Office of UC Tax Services |
Frequently asked
Do Pennsylvania and Indiana have a reciprocal tax agreement?
Yes. Pennsylvania exempts Indiana residents from Pennsylvania income tax withholding on wages, provided the employee files REV-419 with their employer. Without that form on file the employer must still withhold Pennsylvania tax.
Which state's income tax should be withheld?
Indiana. Under the agreement the wages are taxable only by the state of residence, so you withhold Indiana tax and stop withholding Pennsylvania tax once the certificate is filed.
Which state gets the unemployment insurance wages?
Pennsylvania. Unemployment coverage is never split between states for a single job. The localization test assigns the whole job to the state where services are performed, which here is Pennsylvania, regardless of residence or where the employer is headquartered.
Does Pennsylvania's convenience-of-the-employer rule apply to a remote employee in Indiana?
It can. If the employee is assigned to a Pennsylvania office but works from Indiana for their own convenience, Pennsylvania sources those days to Pennsylvania anyway. The rule is displaced only where the remote arrangement is a genuine necessity of the employer, which is a facts-and-circumstances test you should document contemporaneously.