What actually happens
An employee who lives in Pennsylvania and performs work in New Jersey 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. New Jersey and Pennsylvania 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 Pennsylvania. It applies when the employee gives you a signed NJ-165 (Employee's Certificate of Nonresidence in New Jersey). Until that form is in your hands you are required to withhold New Jersey tax, and an auditor will ask to see it. The form stays in your records; it is not filed with the state.
Download NJ-165 from New Jersey
New Jersey's convenience rule changes the answer for remote workers
New Jersey applies a convenience-of-the-employer test. If the employee is on a New Jersey payroll but works from Pennsylvania because they prefer to, New Jersey treats those days as New Jersey-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 New Jersey is covered by New Jersey 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. New Jersey's 2026 taxable wage base is $44,800. The four-factor test in order.
Local taxes are a separate problem
New Jersey: Newark imposes a 1% payroll tax, but it is an EMPLOYER-paid tax on wages, not withheld from employees. New Jersey also has substantial employee-paid state programs withheld through payroll: Unemployment Insurance, Workforce Development, Temporary Disability Insurance and Family Leave Insurance.
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.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Pennsylvania | Pennsylvania Department of Revenue |
| Unemployment insurance | New Jersey | New Jersey Department of Labor and Workforce Development |
| Paid family & medical leave | New Jersey | New Jersey runs two employee-funded programs: Temporary Disability Insurance at 0.19% and Family Leave Insurance at 0.23% for 2026 (0.42% combined), on employee wages up to $171,100. Employers also pay a TDI contribution (0.10%-0.75% on the $44,800 employer base); employers do not contribute to FLI. |
Frequently asked
Do New Jersey and Pennsylvania have a reciprocal tax agreement?
Yes. New Jersey exempts Pennsylvania residents from New Jersey income tax withholding on wages, provided the employee files NJ-165 with their employer. Without that form on file the employer must still withhold New Jersey tax.
Which state's income tax should be withheld?
Pennsylvania. Under the agreement the wages are taxable only by the state of residence, so you withhold Pennsylvania tax and stop withholding New Jersey tax once the certificate is filed.
Which state gets the unemployment insurance wages?
New Jersey. 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 New Jersey, regardless of residence or where the employer is headquartered.
Does New Jersey's convenience-of-the-employer rule apply to a remote employee in Pennsylvania?
It can. If the employee is assigned to a New Jersey office but works from Pennsylvania for their own convenience, New Jersey sources those days to New Jersey 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.