What actually happens
An employee who lives in Pennsylvania and performs work in Virginia 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. Virginia 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 VA-4 (Employee's Virginia Income Tax Withholding Exemption Certificate (reciprocity claimed on the exemption line)). Until that form is in your hands you are required to withhold Virginia tax, and an auditor will ask to see it. The form stays in your records; it is not filed with the state.
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 Virginia is covered by Virginia 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. Virginia's 2026 taxable wage base is $8,000. 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.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Pennsylvania | Pennsylvania Department of Revenue |
| Unemployment insurance | Virginia | Virginia Employment Commission (VEC) |
Frequently asked
Do Virginia and Pennsylvania have a reciprocal tax agreement?
Yes. Virginia exempts Pennsylvania residents from Virginia income tax withholding on wages, provided the employee files VA-4 with their employer. Without that form on file the employer must still withhold Virginia 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 Virginia tax once the certificate is filed.
Which state gets the unemployment insurance wages?
Virginia. 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 Virginia, regardless of residence or where the employer is headquartered.