By: Lisa M. Wood, CPA, MT - Director of Tax
Due to the coronavirus (COVID-19) pandemic, many businesses have employees performing their job duties entirely at home or in a hybrid combination of remote and in-office work. Over the past two years this has caused much confusion with Ohio municipal income tax withholding and other municipal tax issues.
Before COVID-19, Ohio municipal income tax was ordinarily withheld from employee paychecks and paid to the city where the employee’s principal place of work was located. Ohio has a 20-day rule to account for occasional work performed in other municipalities. This rule allows employers to withhold city income tax to the principal place of work for the first 20 days in a calendar year an employee works in a city other than the principal place of work. After the 20th day, the employer is required to begin withholding city income tax to the non-principal place of business.
Tax Implications for 2020 and 2021
In March 2020, the Ohio legislature passed legislation in response to Governor Mike DeWine’s COVID-19 emergency order that required many employees to work from home. It provided that during the period of the emergency order, any day an employee performed services at another location, including the employee’s home, was deemed to be a day of performing services at the employee’s principal place of work. As a result, employers were required to withhold municipal tax to the principal place of work rather than to the location the employee was actually performing the work. This contradicts the general rule of municipal income tax liability being incurred where the work is performed. The law was intended to reduce employers’ administrative burden by not requiring withholding to numerous cities where employees lived and were working from home.
Most municipalities maintain that taxes withheld to the principal place of work during 2020 do not need to be refunded, even if the employee did not work in that municipality. Several taxpayers have challenged this position and there are court cases in our system that will provide guidance once the litigation is resolved. Other taxpayers have filed refund claims with cities. Unfortunately, not all municipalities are being consistent with their approach on refund claims.
Ohio’s biennial budget bill allows employers to assign its employees to a work location for 2021. As a result, an employee working remotely can have their home designated as their principal place of work and the employer can withhold tax to the municipality where the employee is working remotely. The employer also has the option of withholding city income tax based on the employer’s office location rather than where the employee is working remotely. Taxpayers may be eligible for refunds of city income tax overpaid or over-collected in 2021. Currently, it appears that no cities are granting refunds. Some cities have stated that the refund claims for 2021 will not be processed while others have stated that they will hold refund claims until there is resolution of pending litigation.
Tax Implications for 2022
Starting in January 2022, employers must begin tracking employees’ actual work locations and withhold municipal income tax based on where the work is actually performed. If an employee works in more than one city in one day, the employer must withhold income tax to each taxing municipality unless it qualifies for an exception (such as the 20-day rule).
If an employee works a typical hybrid work schedule, the employer must withhold for both municipalities based on the location the employee worked each day or portion of the day. The employer cannot choose to withhold to just one of the cities. The 20-day rule does not apply in a hybrid work situation since the employee is expected to work more than 20 days in each location.
In addition, an employer may owe Net Profit Tax to the employee’s home municipality. Net Profit Tax is calculated on net income from activities conducted within a municipality. Businesses will need to apportion net income based on the three-factor apportionment formula, which will allocate a portion of payroll, property and sales to the municipality where the employee works.
Our experienced team at Buckingham Advisors is here to help. If you have questions related to your specific situation with municipal income tax issues, please reach out to one of our team members.