Work in NJ but Live in PA? Form NJ-165, Reciprocity, and Local Tax

If you work in NJ but live in PA, your taxes are simpler than most cross-border situations: under the Pennsylvania–New Jersey reciprocal agreement, your wages are taxed only by Pennsylvania at its flat 3.07% rate, and New Jersey takes nothing from your paycheck as long as you file the right form with your employer. The catch is on the Pennsylvania side, where your local Earned Income Tax still has to be paid, usually by you directly, because New Jersey employers don’t withhold it.

Give Your Employer Form NJ-165 First

The single most important step is filing Form NJ-165, Employee’s Certificate of Nonresidence in New Jersey, with your employer. On the form, you declare under penalty of perjury that you live in Pennsylvania and claim exemption from New Jersey withholding under the reciprocal agreement. Filing it also authorizes your employer to withhold Pennsylvania income tax instead.¹

Your employer keeps the NJ-165 on file; it doesn’t get sent to the Division of Taxation. If you ever move out of Pennsylvania, you have 10 days to tell your employer so withholding can be adjusted.¹

The reciprocal agreement itself covers all forms of employee compensation: salaries, wages, tips, fees, commissions, and bonuses. Compensation paid to Pennsylvania residents employed in New Jersey is not subject to New Jersey income tax at all.²

What You File in Pennsylvania

Pennsylvania taxes residents on all income regardless of where it was earned. You file a PA-40 and report your full New Jersey wages on it, along with any interest, dividends, capital gains, and rental income.³

The rate is a flat 3.07%, so the math is straightforward: multiply your taxable compensation by 0.0307.⁴ The PA-40 is due April 15.³

If your NJ employer has been withholding Pennsylvania income tax after you filed Form NJ-165, that withholding shows up on your W-2 and credits against your PA-40 liability the same way any Pennsylvania employer’s withholding would. Many cross-border commuters find they owe little or nothing extra at filing time once withholding is set up correctly.

Don’t Forget Pennsylvania Local Earned Income Tax

Nearly every Pennsylvania municipality levies a local Earned Income Tax on wages, on top of the 3.07% state tax. This local EIT is completely separate from your state return and from anything to do with New Jersey. Any tax you paid to New Jersey does not reduce what you owe locally in Pennsylvania.

Your rate depends on where you live. Each municipality and school district has a Political Subdivision Code (PSD Code) that sets the exact rate, and you can look yours up through the Pennsylvania Department of Community and Economic Development.⁵

The problem for commuters: New Jersey employers aren’t set up to withhold Pennsylvania local EIT. That makes you responsible for quarterly estimated payments directly to your local tax collector. Skip them and you’ll face penalties and interest. Contact your municipality’s tax collector early in the year to set up a payment schedule.⁶

If You Live in Philadelphia

Philadelphia’s Wage Tax applies to all your compensation regardless of where it’s earned. The resident rate is 3.74% as of July 2025, and Philadelphia is not a party to any reciprocal agreement, so your NJ wages are taxed in full by the city. Philadelphia residents whose wages are also subject to a local tax in another jurisdiction outside Pennsylvania can claim a credit against the Philadelphia Earnings Tax by including a copy of the W-2 showing that other tax with the return.⁷

When You Still Have to File in New Jersey

The reciprocal agreement protects wages only. If you have other kinds of New Jersey-sourced income, you’ll need to file a nonresident return (Form NJ-1040NR) and may owe New Jersey tax.² Common triggers include:

Self-employment or freelance income from work performed in New Jersey.
Gains from the sale of real estate or other property located in New Jersey.
Your share of income from a New Jersey-based partnership, S-corporation, or LLC.
A refund claim for NJ tax your employer withheld in error.

The NJ-1040NR is due April 15.⁸ You’re required to file if gross income from all sources exceeds $10,000 for single filers or $20,000 for joint filers.⁹ On the return, you report total income but only calculate tax on the portion sourced to New Jersey, using allocation rules based on where the work was performed or the property is located.¹⁰

Credit for Tax Paid to New Jersey

If you do owe New Jersey tax on non-compensation income, Pennsylvania lets you claim a resident credit to avoid double taxation. You report it on PA Schedule G-L, filed with your PA-40.¹¹ Pennsylvania will not grant a credit for taxes paid to New Jersey on compensation, because the reciprocal agreement means NJ shouldn’t have taxed those wages in the first place.¹²

The credit is the lesser of the tax actually paid to New Jersey or what Pennsylvania would have charged on the same income at 3.07%. Because New Jersey’s progressive rates often exceed 3.07%, the credit is frequently capped at the Pennsylvania figure, and the difference isn’t recoverable.¹¹ For example, if you earned $50,000 of self-employment income sourced to New Jersey and paid $2,500 in NJ tax on it, Pennsylvania’s tax on that same income would be $1,535. Your Schedule G-L credit is limited to $1,535, and the remaining $965 is the extra cost of earning that income across state lines. The credit is nonrefundable, so it can reduce your PA liability on the double-taxed income to zero but no further.¹²

Working From Home in Pennsylvania

New Jersey enacted a “convenience of the employer” sourcing rule effective 2023 that lets it tax some nonresidents on days worked from home. It explicitly does not apply to Pennsylvania residents, because the reciprocal agreement is already in place.¹³ If you live in PA and telecommute from home for a New Jersey employer, your wages are taxed only by Pennsylvania, and days worked from your Pennsylvania home are not New Jersey-sourced income.¹⁰

If NJ Tax Was Already Withheld, and What Happens If You Skip the Local Tax

If your employer withheld New Jersey income tax before you filed the NJ-165, or never processed it, file a NJ-1040NR nonresident return to recover the money. Include a signed statement with the return indicating you are a Pennsylvania resident. Once the refund comes through, file the NJ-165 immediately so the same thing doesn’t happen next year.²

The more expensive mistake is ignoring the local EIT. Pennsylvania’s penalty for failing to file a local tax return starts at 5% of the tax owed and adds another 5% for each month the return remains unfiled, up to 25%. The minimum penalty is $5, and willful failure to file can be charged as a misdemeanor.¹⁴

On the state side, both Pennsylvania and New Jersey can require estimated payments during the year if your withholding falls short. Pennsylvania requires estimated payments if you expect to owe at least $430 after withholding and credits, with four installments due April 15, June 15, and September 15, then January 15 of the following year.¹⁵ New Jersey requires estimated payments if you expect to owe more than $400 on your NJ nonresident return, which only comes up for commuters with non-wage NJ income.¹⁶ For most W-2 commuters, the quarterly payments that actually matter are the local ones to your Pennsylvania tax collector.

1
NJ.gov. Employee’s Certificate of Nonresidence In New Jersey, Form NJ-165
2
NJ Division of Taxation. PA/NJ Reciprocal Income Tax Agreement
3
Commonwealth of Pennsylvania. Brief Overview and Filing Requirements
4
PA.gov. 2025 Pennsylvania Personal Income Tax Return Instructions (PA-40 IN)
5
PA Department of Community & Economic Development. Local Income Tax Information
6
PA Department of Community & Economic Development. Local Income Tax Requirements for Employers
7
City of Philadelphia Department of Revenue. Annual Reconciliation of 2025 Employee Earnings Tax Instructions
8
NJ.gov. New Jersey Tax Calendar
9
NJ Division of Taxation. Income Tax – Nonresidents
10
New Jersey Division of Taxation. 2025 NJ-1040NR Nonresident Income Tax Return
11
Pennsylvania Department of Revenue. PA Schedule G-L – Resident Credit for Taxes Paid
12
Pennsylvania Department of Revenue. PA Personal Income Tax Guide – Deductions and Credits
13
State of NJ – Department of the Treasury – Division of Taxation. Convenience of the Employer Sourcing Rule Enacted for Gross Income Tax FAQ
14
Legal Information Institute. 61 Pa Code 121.26 – Penalties for Failure to File or for Filing a Late Return
15
PA Department of Revenue. 2026 Instructions for Estimating PA Personal Income Tax
16
NJ.gov. 2026 NJ-1040-ES Instructions