Ohio Employers Facing Additional Municipal Income Tax Wage Withholding Requirements

December 23, 2021

As the end of 2021 approaches, Ohio employers having annual revenues in excess of $500,000 must become aware of, and plan for, changes to the current municipal income tax withholding regime. To understand the changes and the new requirements, reviewing a bit of history is necessary.

History of Ohio’s Municipal Income Tax Wage Withholding

Historically, Ohio’s municipal income tax was ordinarily withheld and paid to the municipality where the employee’s principal place of work was located. To account for employees who worked from home or multiple locations, Ohio made use of a 20-day rule. Under that rule, employers were required to withhold for the city that was the employee’s principal place of work (generally the employer’s office) for the first 20 days the employee worked at a different location. If the employee worked more than 20 days in that other location, the employer then was required to withhold for that other location.

H.B. 197 Allowed Ohio Employers to Disregard 20-Day Rule

Early in the pandemic as a quick fix to the concerns of many major Ohio municipalities home to large employers, on March 27, 2020, Governor DeWine signed emergency legislation H.B. 197 which froze an employee’s principal place of business to where it was on March 9, 2020. This provision remained effective for the duration of the Department of Health’s stay-at-home order, which expired May 31, 2020. This legislation directed employers to disregard the 20-day-rule, thus permitting employers to continue withholding for the employee’s principal place of work (generally the employer’s office). However, employers were left wondering how to comply post May 31 if employees continued working from home.

H.B. 110 Provides Options to Employers With Work-From-Home Policy

On July 1, 2021 the legislature enacted and the Governor signed H.B. 110 which, through Dec. 31, 2021, provides certain municipal income tax withholding options to employers adopting a work-from-home policy. Employers with COVID-19 related remote work policies are permitted to withhold based on the employer’s office location rather than where the employee resides or works remotely. This provision expires by its terms at the end of 2021.

Employers Will Be Governed By Traditional Place of Work in New Year

Beginning with the New Year, employers will be governed by the traditional place of work as provided by Ohio Revised Code Section 718.011(A)(7) and the traditional 20-day-rule. If an employee works from home or otherwise remotely from the employer’s office, the employer will be required to withhold and pay municipal tax to the city in which the employee actually rendered the services (subject to the still existing 20-day-rule). As a result, it appears employers in most cases will be required to track the location at which each employee renders services, withhold for each such location and pay the withheld tax to possibly numerous jurisdictions. The administrative burden on employers could prove to be a nightmare.

In addition and probably most importantly, after Jan. 1, 2022 employers will lose the protection of ORC Section 757.40(B) contained in H.B. 110 which provided that if an employer withheld and remitted municipal income tax from wages earned between March 9, 2020 and Dec. 31, 2021 to the city of the employee’s principal place of work (generally the employer’s office), the employer could not be assessed tax, penalty or interest by any other municipality for failure to withhold that other municipality’s income tax. For example, this provision prevented, say, Cleveland Heights from going after an employer located in the City of Cleveland who withheld City of Cleveland taxes on behalf of a Cleveland Heights resident employee who worked from home for all of 2021. In the absence of further legislation (highly unlikely as the Ohio Legislature is not due to reconvene until mid-January 2022) this potential recordkeeping nightmare will continue.

The provisions described apply whether an employer has a written work-from-home policy or not; even where the employer permits employees to determine whether to work from home occasionally, irregularly or intermittently.

Suggestions for Employers

These provisions apply only to employers having annual revenues in excess of $500,000. Below are suggestions for such employers:

  • Possibly enter into withholding agreement(s) with municipalities in which employees provide services. For example, employers and municipalities may agree that employer will simply withhold x% of each employee’s wages even if the employee works more than x% within the municipality for some periods during the year.
  • Consider entering into written Hybrid Work Agreements stating the number of days an employee is expected to work in each locality. Could also provide that employee would be responsible for reporting any differences from the agreement on the employee’s municipal income tax return and paying the resulting tax.
  • Adopt policies requiring employees to report the location where they rendered services during each payroll period.

If you have questions or concerns about how these pending changes will affect your business, or would like to discuss strategies to ease the burden, contact Kevin O’Connor at kto@kjk.com or 216.736.7213.