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Ohio’s Updated Municipal Income Tax Rules Regarding Employees Who Work Remotely

By Matthew Stanley, Associate

Prior to the pandemic, Ohio employers with a fixed worksite location were not required to withhold municipal income tax from an employee’s compensation for another municipality unless that employee worked more than 20 days in the other municipality (the “20-Day Rule”).

With the onset of the pandemic, Gov. Mike DeWine signed emergency legislation on March 27, 2020 that made an accommodation to employers and those municipalities whose local businesses experienced large and unexpected amounts of their workforce transition to work-from-home employees as a result of COVID-19. This accommodation essentially froze an employee’s principal place of work to where it was pre-pandemic and allowed Ohio employers to disregard the 20-Day Rule for the purpose of withholding the municipal income tax of its work-from-home employees.

On December 31, 2021, this accommodation expired and now employers must withhold and employees must pay municipal taxes in accordance with the 20-Day Rule starting with tax year 2022. To the extent employees continue to work from home in excess of 20 days in a calendar year, employers will be required to adjust municipal income tax withholding to comply with the 20-Day Rule.

Employees who worked from home in 2021 may choose to pay municipal income taxes to the municipality in which they lived and worked and apply for a refund (if applicable) if their employer withheld municipal income taxes for the municipality of the employer’s fixed worksite location in accordance with the accommodation rules..

Employees seeking a refund must meet the following criteria:

  1. The employee worked from home for more than 20 days in 2021, and
  2. The employee’s home is not in the municipality of the employer’s fixed worksite location, and
  3. The employer withheld municipal income taxes for the municipality of the employer’s fixed worksite location.

If these criteria are met, an employee may qualify for a refund if the municipality in which he or she resides has no income tax or a lower income tax rate than the municipality of the employer’s fixed worksite location.

[1] Please Note: A Small Employer Exception exists that allows businesses with less than $500,000 revenue in the preceding taxable year to withhold municipal income tax for the employer’s “fixed location,” if one exists, even if employees work in other taxable municipalities. A “Fixed Location” means a permanent place of doing business in Ohio, such as an office, warehouse, storefront, or similar location owned or controlled by an employer.

Whether such a refund may be available with respect to 2020 is currently the subject of litigation. Nicola, Gudbranson & Cooper, LLC continues to monitor changes to the law as we all try to recover from the Covid-19 Pandemic. Should you have any questions, our attorneys are happy to discuss this topic or any additional legal needs you may have.

Matt Stanley is an Associate with NGC who advises private and publicly held clients in matters including corporate governance, business entity formation and restructuring, mergers and acquisitions, corporate transactions, contracts, commercial real estate transactions, financing/banking transactions, and estate and business succession planning. If you have questions regarding Ohio’s updated municipal income tax law, you can reach Matt at: [email protected].