IN to PA Reciprocal States, but PA charging penalty

[leslieh1314]

I worked most of the year Indiana but live in Pennsylvania (reciprocal st).  Employer paid my state tax to IN instead of PA but PA wants me to pay underpayment penalty. Since this reciprocal state did not send the tax to PA, do I still have to pay the penalty?

[re2boys]

IN does not send the taxes withheld to PA.  You must ask IN for refund, and pay your own taxes to PA.

[DS30 · Accepted solution]

Unfortunately yes, you would still owe any underpayment penalty in PA if your employer withheld state taxes in the wrong state under the reciprocal agreement.

If the error was with your employer, you may ask them about a reimbursement of any PA penalties due to their error. Otherwise, just make sure that Form WH-47, Certificate of Residence, certifying the employees' state of legal residence, is submitted to Indiana employer to avoid this issue in the future.

Please note -

In order to get the full refund of your IN state income tax withholdings, you will need to file a nonresident IN return but report zero "0" income from IN (even though you do have IN wage income). You need to file your IN return this way because PA does not allow a credit for tax paid to a reciprocal state on wages, salaries and commissions. If tax was withheld by a reciprocal state (IN), you must file directly with the state for a refund of those taxes. You must mail in this IN nonresident state income tax return and include your state W-2 information. You will want to include an explanatory statement with your IN return stating your situation (that your IN employer withheld IN taxes from your wages in error due to a reciprocal agreement with PA).