Shift to remote work has lasting impact on Ohio’s municipal income tax withholding rules
Ohio’s municipal income tax is withheld from employee paychecks and paid to the municipality where the employee’s principal place of work is located. The employee’s principal place of work is ordinarily in the municipality where the employer is located; however, since the beginning of the COVID-19 pandemic, employees have increasingly spent time working from remote locations - and it appears that this trend will continue in some way for the foreseeable future.
In a situation where an employee begins working remotely (e.g., from home), Ohio ordinarily follows a "20-day rule" under which an employer doesn’t need to withhold tax for a municipality if the employee is working in the municipality for 20 or fewer days. (An employee can only be considered to be in one municipality per calendar day.)
Employers are required to withhold municipal income tax for each employee’s principal place of work. The challenge is to identify and track additional municipalities where the employee works for more than 20 days. With employees working from home for extended periods due to the COVID-19 pandemic and the changing business landscape that permits remote work, many businesses have expressed concerns about the potential impact of the 20-day rule and whether they would be required to withhold tax for those employees in different municipalities.
The passage of HB 197 in March 2020 alleviated these concerns. Section 29 of the bill provided a temporary rule whereby the 20-day rule would not apply to employees working from home during the COVID-19 health emergency. Accordingly, during the health emergency, employers would not be required to withhold tax for a municipality even if an employee worked from home in the municipality for more than 20 days.
This temporary rule was set to end 30 days after the state of emergency declaration was lifted, which in Ohio happened on June 18, 2021. However, on July 1, 2021, Ohio Gov. Mike DeWine signed HB 110 into law, which extended the temporary withholding rule and clarified how employers should withhold municipal income taxes. It provided employers with two options for how to withhold municipal income taxes through December 31, 2021, when employers worked from home in response to the COVID-19 pandemic.
- Through the end of 2021, employers were able to assign an employee to a new or different work location, such as their home. By doing this, an employer could change the employee’s principal place of work. For those newly assigned employees, the employer was required to withhold and pay tax to the municipality where the newly assigned principal place of work was located. This essentially allowed the employer to follow the traditional “20-day rule.”
- Alternatively, through the end of 2021, employers were permitted to withhold based on the employer’s office location rather than where the employee worked remotely.
Effective January 1, 2022, the traditional 20-day rule was reinstated. Accordingly, employers must follow the 20-day rule for any wages paid after that date.
While the relevant provisions of HB 110 apply for purposes of municipal income tax withholding, they do not apply for purposes of the employee’s underlying municipal income tax obligation. Accordingly, an employee may be entitled to a refund for municipal income tax that was overwithheld in 2021. Whether employees are entitled to a refund for tax that was over withheld in 2020 has yet to be resolved and will likely be determined by Ohio courts.
If an employee seeks a refund, HB 110 provides that the municipality may not require, as a condition for processing the request, any statement or other documentation from the employer other than:
- A statement verifying the number of days the employee worked at the employee’s principal place of work during the taxable year.
- That the employer did not refund any withheld taxes to the employee.
This provision attempts to limit the administrative burden imposed on employers because of the large number of anticipated employee refund claims.
Employers can take further solace in the fact that HB 110 provides the following additional protection:
If any employer withheld and remitted municipal income tax from an employee’s qualifying wages earned between March 9, 2020, and December 31, 2021, to the municipal corporation in which the employee’s principal place of work is located, the employer shall not be assessed any tax, penalty, or interest by any other municipal corporation for failure to situs or apportion those wages to the other municipal corporation or for failure to withhold municipal income tax from such wages to the other municipal corporation.
In summary, Ohio businesses should review their withholding practices and consult with a tax professional to ensure compliance with HB 110 and the other Ohio withholding requirements because it appears remote work is here to stay. Individuals who have worked remotely because of the COVID-19 pandemic or because their employer allows remote work should similarly work with a tax professional to determine whether they have overpaid municipal income tax, may be entitled to a refund, and the consequences associated with seeking refunds in one municipality only to have to pay tax to the municipality in which they work (e.g., where they live).