April 15, 2022
This client alert is a follow-up to our previous client alert, which can be viewed here.
In the face of more employees working remotely due to the ongoing coronavirus pandemic, Ohio enacted a new law governing municipal income tax withholding. Effective January 1, 2022, employers must withhold municipal income taxes where an employee’s work is actually performed, for each portion of a day worked in any taxing municipality where the employee performs services for the employer.
This article outlines suggested “best practices” your Ohio business may consider implementing to ensure compliance with this new legislation.
- Maintain Accurate Records
Employers must keep accurate records of where employees are working throughout the workday. In order to withhold the correct amount of municipal taxes, the employer must ensure that records clearly indicate in what physical location each employee worked throughout each work day.
This presents a complicated burden for employers because employees could work in multiple municipalities in a single day. In the current work culture, employees could start the workday in their home, respond to some emails in a coffee shop during lunch, and finish the day at the downtown office for a meeting. In such situations, employees could work in numerous municipalities throughout the day, and the employer is responsible for properly documenting such employee migration throughout the day.
- Require Employees to Identify Work Locations
Some employers have discussed implementing work rules that would shift much of the burden of compliance with this legislation on to their employees. For example, employers may require employees to document where they are working throughout the day. If employees move their physical workspace throughout the day, they would document that change, and provide that documentation to the company.
While it would lessen the burden on employers, it would likely be an unpopular workplace rule. Furthermore, it is unlikely that employers could threaten punishment if employees failed to comply.
- Track Time and Location of Employees through Time Cards
With the technological advancements in internal and external payroll software, many payroll and human resource companies have worked to remain compliant with evolving legislation. For example, ADP offers a premium service to companies that ensures ADP will adapt its software to help companies comply with specific tax laws, including Ohio’s new municipal withholding tax law.
Internally, using location services through an employee’s electronic device would also enable employers to track the physical location of their employees throughout the day.
- Pre-determined Hybrid Work Agreements
Employers might negotiate with employees how many days an employee will work from certain locations through the workday or work week. That way, employers would have a much easier starting point in calculating the municipal withholding rates. Of course, such arrangements would require updates at any point that an employee deviated from the terms of the arrangement.
- Withholding agreements with municipalities
Finally, employers may also alleviate their burden under this new law by making withholding agreements with the municipalities in which their employees frequently and regularly perform services. If the municipality agrees, the employer may withhold a certain predetermined percentage of an employee’s wages and remit that portion to the municipality, even if the employee works more or less than the predetermined amount of time within the municipality.
If you have questions about complying with Ohio’s new municipal income tax withholding requirements—including questions about eligibility for an exemption—please contact Walter Haverfield’s tax attorneys.