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New Jersey To Terminate Reciprocal Withholding Agreement With Pennsylvania

Oct 07, 2016

Governor Chris Christie, on September 2, 2016, gave 120 days’ required notice of intent to end the State’s 40-year-old reciprocal income tax withholding agreement with Pennsylvania. If New Jersey follows through, the agreement will terminate at the end of 2016, affecting employers and employees in both states.

Employees who live in one state but work in another are subject to both states’ income taxes. These employees must file income tax returns in both states, but can usually obtain a credit on their resident income tax returns for tax withheld for their work state.

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.

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.

Approximately 240,000 employees in both states would be affected, if the agreement terminates. Pennsylvania residents would end up paying more in income taxes, due to New Jersey’s graduated income tax rates. In the interim, employers in New Jersey and Pennsylvania should prepare for the agreement’s termination by taking the following steps:

•Review employee payroll information to determine which employees will be affected;•Communicate to those employees the potential termination of the agreement and anticipated impact on their income tax withholding; •Provide those employees the appropriate 2017 withholding allowance certificates (Form W-4, Employee’s Withholding Allowance Certificate, or optional Form NJ-W4) so they can adjust their withholding allowances for 2017, if they so choose; and•Prepare to update payroll systems to begin withholding income taxes on January 1, 2017, for the affected employees’ work states.