Let me answer one question at a time:
1. Is this OK? Yes. You enter the information into TurboTax as it appears on your W-2
2. Your 1099 is reportable to both states. Since you have a loss in PA, you will not have tax there on that income. Self-employment income (Sch. C) must be reported to both states.
3. Your wages (W2), however, are only taxable in NJ because NJ and PA have a reciprocal agreement. Philly does tax you (that's not covered by the reciprocal agreement), but you do not need to file anything in the PA state return. Thus, with the "Special PA situations", you do click on the "earned income in another state" box to ensure that the W2 reports zero income to PA. I will provide a second answer with some screenshots to assist.
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