Earlier this month, Gov. Mike DeWine signed the 2022-2023 biennial Ohio budget into law. While the bill primarily focuses on various budget items for each agency, it also includes a number of provisions dealing with tax law changes. These changes included reductions in personal income tax, exemption of certain employment services and employment placement services from sales and use tax, and modification to the municipal income tax withholding requirements.
COVID-19 Impact on Municipal Income Tax Withholding Change
Normally, an employer is required to withhold and remit taxes to the municipality in which is the employee’s “principal place of work.” Under the general practice, an employer is required to withhold to a municipality once the employee is working in that municipality for 20-days or more, unless an exception applies. In response to the coronavirus pandemic, the Ohio General Assembly passed House Bill 197, which temporarily suspended the 20-day requirement. Under House Bill 197, an employer could treat the time the employee was working from home as if the employee was still working from their original principal place of work. Under House Bill 197, these temporary changes were to remain for the duration of the Governor’s state of emergency as declared under Executive Order 2020-01D and 30 days thereafter. On June 18, 2021, Gov. DeWine rescinded his Executive Order 2020-01D.[1] However, under the provisions of the budget bill, the temporary changes are extended through Dec. 31, 2021, with certain modifications.
Budget Bill Municipal Tax Changes
Under the provisions of the budget bill, for the period beginning March 9, 2020, through Dec. 31, 2021, an employer may treat any day on which an employee performs personal services at the employee’s home or another location that is not the employee’s original principal place of work due to the COVID-19 pandemic as a day performing such services at the employee’s principal place of work. Therefore, under the new provisions, an employer may continue to withhold to the original principal place of work, notwithstanding that the employee may have performed services for greater than 20 days in a municipality other than the principal place of work. If an employee is working from home, in response to the coronavirus crisis, then the employer may continue to withhold to the original location. However, if an employee has begun working in a municipality, for reasons other than the coronavirus, then the normal 20-day withholding rules still apply.
Municipal Withholding Refund
In addition, under the provisions of the budget bill, an employee who had their wages withheld to a municipality in which they were not working may request a refund of such withheld wages from such municipality. Under the bill, a municipality may not require an employer to provide any documentation supporting the refund claim other than:
(a) a general statement verifying the number of days that the employee worked at the employee’s principal place of work, and
(b) certification that the employer has not provided a refund of any withheld taxes directly to the employee.
Employer Safe-Harbor Provision
Finally, the bill includes a safe harbor provision for employers by prohibiting municipal taxing authorities from assessing penalties or interest against an employer for a failure to withhold to the municipality where the employee may have actually performed services or a failure to properly situs an employee’s wages to that the municipality for purposes of the employer’s net profit tax liability.
Top Considerations For Employers
Under this temporary change to municipal income tax withholding, an employer should carefully consider several items as they update current policies related to work-from-home, including:
- Are you appropriately documenting the days that an employee is working from a location other than their principal place of work?
- If an employee is working from home, is this due to the coronavirus pandemic or for the convenience of the employee?
- If an employee has permanently transitioned to working from a new location, has the company appropriately registered and begun withholding to the new location?
- If employees are not working in new locations, for reasons other than the coronavirus pandemic, does such work create nexus with that municipality for purposes of net profits tax?
As companies begin to navigate a changing work culture including a significant increase in work-from-home opportunities, the taxing impact of such change must be considered. For more information on municipal income tax withholding, please contact our Tax Practice Group, including Demetrius Robinson, at (614) 427-5749 or djr@kjk.com.
[1] Executive Order 2021-08D