Just want to be clear ... a Notification sounds off ... you use the watch to acknowledge it then dismiss it, but the Notification (in the Notification panel) is still listed on the phone
I have exactly the same problem. It happens for me since beta 1. As you said, both phone and watch vibrates (and sound) when I receive a notification even if the option "Mute connected phone" is set in the Galaxy Wareable APP. I also did a factory reset, and worked fine for some hours, but then started to happen again. I have also disabled the notification sound and set the notification vibration pattern to "silent" in the phone settings and the phone still vibrates
Well, this issue is currently happening with my Galaxy Watch 4 Classic and S21.
Is there a fix?
The setting does function properly with my Gear Sport and Gear S3 on the same phone.