Commuting Across the Delaware: Key Tax Considerations for South Jersey Residents Working in Philadelphia

For countless residents of Haddonfield, Haddon Township, Collingswood, Haddon  Heights, Cherry Hill, and throughout South Jersey, the daily commute to Philadelphia is a way of life. While the short trip across the Delaware River offers exciting career opportunities, it also creates a unique set of income tax considerations that can trip up even savvy taxpayers.

At KBI Consulting, your local Haddonfield, NJ tax preparation specialists, we frequently guide clients through the complexities of multi-state taxation. Here's what you need to know if you live in New Jersey and work in Philadelphia:

1. The NJ-PA Reciprocal Agreement: Good News for State Tax, But...

Let's start with the good news! New Jersey and Pennsylvania have a reciprocal income tax agreement specifically for wages. What does this mean for you?

• No Pennsylvania State Income Tax on Wages: As a New Jersey resident, your wages earned in Pennsylvania are exempt from Pennsylvania state income tax. You should provide your Pennsylvania employer with a completed Form REV-419, Employee's Nonwithholding Application Certificate, to ensure they do not withhold PA state income tax from your pay. Your wages should instead be subject to New Jersey income tax withholding.

• You Still Pay NJ Income Tax: Your entire income, regardless of where it was earned, is taxable by New Jersey as you are a resident of the state.

This reciprocal agreement simplifies your state tax filing significantly by avoiding the need to file a non-resident Pennsylvania state income tax return for your wages.

2. The Philadelphia City Wage Tax: A Separate Beast

Here's where the common confusion arises: the state-level reciprocal agreement does NOT apply to the Philadelphia City Wage Tax.

• You WILL Pay Philadelphia City Wage Tax: If you work in Philadelphia, whether as a resident or non-resident, your wages are subject to the Philadelphia City Wage Tax. Your employer in Philadelphia will typically withhold this tax from your paycheck. The non-resident rate for the Philadelphia Wage Tax is a flat percentage of your gross wages earned in the city.

• No Reciprocity with NJ: The City of Philadelphia does not have a reciprocal agreement with New Jersey (or any other state) for its municipal wage tax. This means you are liable for this tax.

3. Claiming Your Credit on Your New Jersey Return (Schedule NJ-COJ)

Since you are a New Jersey resident, your total income (including the wages earned in Philadelphia) is taxable by New Jersey. To prevent you from being "double-taxed" on the same income by both Philadelphia (via its Wage Tax) and New Jersey (via its state income tax), New Jersey provides a mechanism to claim a credit for taxes paid to other jurisdictions.

• How it Works: On your New Jersey Resident Income Tax Return (Form NJ-1040), you will file Schedule NJ-COJ (Credit for Taxes Paid to Other Jurisdictions). This allows you to claim a credit for the Philadelphia City Wage Tax you paid.

• Important Limitation: The credit you can claim is generally limited to the lesser of the actual tax you paid to Philadelphia or the amount of New Jersey tax that would have been due on that same income. This means the credit may not always fully offset the entire amount of Philadelphia City Wage Tax you paid, depending on the varying tax rates.

4. Remote Work Considerations for Philadelphia Employers

The rise of remote and hybrid work adds another layer of complexity. If you're a New Jersey resident working for a Philadelphia-based employer, but spend some or all of your time working remotely from your South Jersey home, listen up:

• "Convenience of the Employer" Rule: Philadelphia's Wage Tax policy is nuanced. Generally, if your employer requires you to work outside of Philadelphia (e.g., due to office space limitations), those specific wages for the days worked outside the city may not be subject to the Philadelphia Wage Tax. However, if working remotely from South Jersey is for your convenience, those wages are still subject to the Philadelphia Wage Tax.

• Documentation is Key: If you believe you qualify for a refund of Philadelphia Wage Tax due to working outside the city for the "convenience of the employer," you'll need meticulous documentation (employer letters, work logs) to support your claim with the Philadelphia Department of Revenue. This is a common area for review and often benefits from professional guidance.

5. Managing Your Withholding to Avoid Surprises

Because of the multi-state nature of your income, it's crucial to regularly review your tax withholding.

• Federal W-4: Ensure your federal withholding is accurate based on your overall tax situation.

• New Jersey W-4: Verify that your New Jersey employer (if applicable, or if you adjusted your Pennsylvania employer's withholding) is withholding enough New Jersey income tax.

• Quarterly Reviews: If you're consistently getting large refunds or owing a significant amount at tax time, it's a sign that your withholding needs adjustment. This is particularly important for those impacted by the Philadelphia Wage Tax, as the NJ credit might not fully cover it, leading to a balance due to New Jersey.

The Bottom Line for South Jersey Commuters:

Living in South Jersey and working in Philadelphia presents a unique tax puzzle. While the PA-NJ reciprocal agreement is a relief for state-level income tax on wages, the Philadelphia City Wage Tax requires careful attention and proper credit calculation on your New Jersey return. Navigating these details correctly is essential to ensure compliance and avoid unexpected tax bills or penalties.

Don't let cross-state taxation complicate your life. As your local Haddonfield, NJ tax preparation experts, we specialize in assisting individuals and families who live in South Jersey and commute to Philadelphia. We can help you understand your specific obligations, ensure accurate withholding, and prepare your tax returns to maximize your credits and minimize your liability.

Contact KBI Consulting] today at (610) 420-4952 or email us at KBI@kbiconsultants.com, for personalized tax advice and expert preparation.