February 10, 2022
Beginning in 2020, COVID-19 prevented millions of people from leaving their homes and forced employers to create work-from-home policies. The work-from-home policies promoted virtual work environments, as employers adapted their workflows to embrace the new normal.
At first, employers considered virtual work environments a temporary solution. But, employees and employers have found considerable value in allowing employees to work from home, even as the most pressing dangers from COVID-19 are subsiding. Now, many employers are moving to permanent hybrid work environments, offering employees the ability to split their work time between offices and their homes.
In Ohio, 649 municipalities and 199 school districts impose income taxes where an employee works. And, employers are generally required to withhold applicable municipality and school district income taxes. When employers first instituted work-from-home and hybrid work policies, it was unclear what municipality’s taxing rules applied if an employee’s home and the employee’s office are in different municipalities. Ohio’s 2021-2022 budget law, passed in 2021, made Ohio’s municipal income tax withholding requirements clearer.
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. The rule applies even when an employee works in a different municipality in the same day.
Example. An employee, John, works from home three days per week and in the office two days per week. John’s home is in Cleveland Heights, Ohio, but his office is in Cleveland, Ohio. Both Cleveland Heights and Cleveland impose municipal income taxes. Under the new law, John’s employer must withhold and pay over Cleveland Heights income taxes for the three days John works from home, and Cleveland income taxes for the two days John works from the office.
The general rule has several exceptions, including a 20-Day Occasional Entrant Exception, Independent Contractor Occasional Entrant Exception, and Small Employer Withholding Exception. Walter Haverfield will cover the exceptions and employer best practices in an upcoming client alert.
The Ohio Society of CPAs has released a comprehensive Municipal Tax Withholding and Refund Q&A Guide, which can be downloaded here.
If you have questions about complying with Ohio’s new municipal income tax withholding requirements—including questions about eligibility for an exception—please contact Walter Haverfield’s tax attorneys Vince Nardone and Mike Sorice. Their contact information is below.