As the pandemic drags on, employees continue to split their time between the office and home — leaving many questions for employers and employees related to city income tax withholding. Below takes a look at the reality Ohio municipalities have faced over the past two years and where those in the state stand today.
Ohio Municipal Withholding in 2020 and 2021
We provided several updates around the employer withholding rules in 2020 and 2021, beginning with Ohio issuing an emergency order on March 9, 2020, and passing HB 197. HB 197 attempted to simplify employer withholding during the anticipated temporary emergency period while employees were displaced from their principal place of work. Employers were required to continue withholding as if employees were reporting to their pre-pandemic principal place of work.
Then on June 18, 2021, Governor DeWine ceased the emergency order and employers had 30 days to implement pre-COVID 19 withholding procedures. However, legislators stepped in to assist employers still struggling to run their businesses efficiently in a COVID environment. They passed HB 110 which allows, but does not require, employers to continue withholding on employee wages to the pre-pandemic principal place of work through December 31, 2021.
While many businesses benefited from the simplified COVID withholding provisions, some employees were negatively impacted when transitioning their work duties to lower or no tax municipalities. HB 110 explicitly authorizes displaced employees to file refund claims with their principal place of work city for days they did not work within the city during 2021 only.
Legislators considered extending the refund opportunity back to 2020 within HB 110, but ultimately decided to leave the 2020 refund opportunity up to the courts. Several taxpayers have filed suit against Cleveland and Columbus, among other cities, to secure 2020 tax refunds for days that were not worked at their principal place of work due to Ohio’s stay-at-home order. While we have seen several cases settle or rulings against a taxpayer around employer withholding, none of these closed cases have addressed an employee’s ability to request a 2020 refund.
As we wait for further 2020 guidance, employees may continue to file 2020 refund claims within three years after the tax was due or paid, whichever is later. Most cities have stated they will not issue a 2020 refund to temporary remote workers until the courts issue a decision.
What Are Ohio’s Municipal Withholding Rules for 2022?
We often hear that in 2022, employers will merely return to the pre-COVID Ohio municipal withholding rules, but most businesses have changed over the past two years. Many more employees are working entirely remotely or working a hybrid schedule where they split time between the office and at-home Most employers do not have procedures in place to track where an employee spends their time.
Ohio’s municipal withholding rules may be interpreted differently by each reader. However, one thing is certain: Ohio employers must identify a method to track where employees work each day. Employers could track key card swipes at the office or require employees to self-track each day where they work. There are also phone apps and workplace software that can easily accomplish such a task with minimal effort.
In the past, most employers withheld to an employee’s principal place of work. A principal place of work is defined as a “fixed location” that an employer controls and to which employees are required to report “regularly.” There are several exceptions to this rule, including:
- Small Employers. When an employer has less than $500,000 of revenue in a year, the employer is only required to withhold to the city where it is located.
- Employers in Certain Industries. Contractors or businesses that employ athletes or entertainers are generally required to track and withhold to the city where the contractor’s employee or athlete works each day.
- 20-Day Occasional Entrant Exception. When an employee spends 20 or fewer days at a worksite location, the employer may opt to continue to withhold to the principal place of work.
- Ohio law states a “worksite location” excludes an employee’s resident city. The code does not address why an employer’s resident city is excluded as a worksite city nor what that means in relation to withholding.
- One interpretation some cities within CCA’s jurisdiction have made is that all resident city withholding should be remitted to the principal place of work when an employee reports to a business regularly, which is often considered reporting there once or twice each week). However, other cities, such as those under RITA, do not believe this provision applies and the employer is required to begin withholding at day 21, and possibly day one when the employer knows an employee will exceed the 20-day threshold for the calendar year.
- The Overlooked Exception. Ohio law allows an employer to enter into an agreement with a municipal tax administrator on a set method of withholding. This is a great option for large employers that may struggle to timely track employee whereabouts. An employer could request an agreement to withhold on a specified percentage of wages for all employees or perhaps a group of hybrid employees to the principal place of work and the remainder to their resident city.
In an effort to simplify the Ohio municipal withholding rules, Ohio also updated their rules prior to the pandemic on what to do when an employee works in multiple cities during a day. Generally, an employee will assign their day to the location where they spent the most time performing work duties that day. Further, Ohio describes certain employee tasks, such as most travel time to/from and between worksite locations throughout a day, that should be assigned to the employee’s principal place of work when calculating where the most time was spent each day.
When employers do not have a location in Ohio or when Ohio employers agree to allow employees to be entirely remote at their home residence, the withholding decisions are straightforward, and the employer will withhold to the employee’s resident city. But how should an employer withhold on an employee where a hybrid work arrangement exists? The answer can depend on several factors, including:
- Is the employee’s hybrid arrangement temporary or a permanent long-term shift?
- Was a formal remote agreement entered into?
- How often does the hybrid work arrangement require the employee to report to a principal place of work/fixed location?
- How does your work city view the current post-COVID withholding rules on hybrid work arrangements? It’s important to discuss with your local city.
- Note some cities, such as those in CCA, feel the principal place of work takes priority over a residence city. Other cities, such as those in RITA, Akron and Fairlawn, support a withholding method that mirrors an employee’s work city schedule.
Additional Employer Considerations
- Credits/Incentives. If a business negotiated a local incentive for creating jobs, how will the reduction of withholding tax on hybrid employees’ wages impact that agreement?
- Net Profit Return Nexus
- This occurs when employers have employees working regularly in new cities that could create a business profit return filing requirement, which is in addition to the payroll withholding requirement.
- If an employer will have net profit return nexus and have more employees working remotely from home than they did pre-pandemic, employers should consider electing into the centralized net profit filing program for 2022 by April 15, 2022.
- Administrative Effort. Business that offer numerous different hybrid work arrangements may spend more time tracking/remitting withholding obligations. For example, business must track employees, understand each city where an employee anticipates working more than 20 days annually, and prepare local payroll registrations. When using a third-party payroll provider, there may also be additional costs to withhold/remit tax to each new local municipality.
It is very important for employees to understand how their employer will withhold on wages during 2022. If an employer will begin splitting wages between a principal place of work and a resident city, employees must work with their employer to track where they work each day.
Some employers may continue to withhold only to the principal place of work. Under this scenario it is important employees continue to remit resident city tax estimates as needed, as well as track their work city each day and be able to provide supporting documentation if they choose to file a 2022 Ohio municipal refund claim.
There are no legislative restrictions on cities providing refunds on 2022 excess withholdings, but with the increase in remote work arrangements and its impact on city budgets, it is anticipated municipalities will become more creative in scrutinizing employee refund claims and demand documentation that supports their work location position. In addition to support around where each day is worked, employees filing for a refund claim are typically required to obtain an employer certification that their employer agrees with the days reported to the business location by the employee. Further, the work city may require the employee to provide a copy of their 2022 resident city return.
However, not all employees will find it is worthwhile to pursue a tax refund. Every employee’s circumstances vary. It is important to understand how much money an employee may actually receive from their workplace city, versus how much of a credit they may lose in the resident city, as well as the costs to prepare and file a workplace refund claim when using a third-party tax return preparer.
There are certainly many twists and turns when considering Ohio municipal withholding rules. In addition to contacting your tax team and state and local tax specialists, for more information you can also:
Contact Hannah Prengler directly at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.