Basically, per SweetieJean's references, NY considers your income as NY sourced as the employer doesn't care where you are when performing the work and they have won the argument in court.
After preparing your federal return, you will then need to prepare a NY non-resident return reporting only your NY sourced income.
Then prepare a PA resident income tax return reporting ALL income, regardless of where earned. Be sure the PA return contains a Schedule G where you receive a credit for taxes paid to another state (NY) to eliminate double taxation. Do the PA return in TurboTax last, otherwise the credit will not flow properly.
Finally, prepare your PA local earned income tax return for your local municipality. All earned income, including your NY W2 income is reported. TurboTax does not prepare this return. Note, that if you pay $50 in NY taxes (as an example) but your PA credit is only $40 (this can happen as NY generally has a higher tax rate than PA), you can apply the remaining $10 as a credit on you local return (attach a copy of your PA Schedule G with copies of all W2s to the local return)..
