In a press conference last week, New Jersey Governor Christie announced his intention to end a long-standing tax reciprocity agreement with Pennsylvania.
The agreement, which has been in place since 1977, currently allows NJ employers with PA resident employees to withhold the PA personal income tax instead of the NJ gross income tax on employee wages. The agreement also allows PA employers to withhold the NJ gross income tax for its employees that are NJ residents.
In February of this year, Governor Christie signed Executive Order 209, authorizing the state’s Treasurer and Attorney General to determine what steps would need to be taken to withdraw from the agreement with PA, as well as the fiscal impact of taking such action. The Governor’s action was taken as the result of a large budget deficit that was created when the NJ legislature failed to enact $250 million of cost savings from public employees’ health insurance.
New Jersey’s Treasurer and Attorney General determined that the reciprocity agreement is a contract between the two states and can be terminated by the Governor without any legislative action. The only stipulation is that the agreement requires 120 days’ notice of intent to terminate.
It appears Governor Christie did just that with his September 2, 2016 press conference. However, it is worth noting that other than this press conference, there has not been any other press release on this matter from the Governor’s office. Governor Christie has left the door open for the agreement to remain in place if the legislature takes the necessary action to reduce public employees’ health insurance costs.
If the reciprocal agreement between PA and NJ is, in fact, terminated, here are some key things to know about the effect of the termination:
- The agreement will remain in effect until the end of 2016, and would then end on January 1, 2017.
- Beginning January 1, 2017, PA employers will need to withhold the PA personal income tax from employees working in PA but living in NJ.
- Beginning January 1, 2017, NJ employers will need to withhold the NJ gross income tax from employees working in NJ but living in PA.
- Businesses currently registered with each state for the purposes of withholding and remitting personal income taxes should withdraw from the respective state to ensure that they do not have to continue to file zero returns.
- There should be no impact on unemployment compensation tax reporting. Unemployment compensation tax has been, and continues to be, reported to the state in which the employee’s work is localized (i.e., where the employee is performing his or her services).
Only time will tell if Governor Christie’s plan to end reciprocity between the two states will become a reality. We will keep you updated on any further developments and how they may impact your business.
Contact Kreischer Miller’s State and Local Tax Group if you have any questions.
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