Legislation that gave Municipal income tax relief and permitted employers to continue to withhold municipal income taxes based on an employee's principal place of work even though the employee may be working from home due to the COVID-19 emergency declaration is no longer in effect as of January 1, 2022.
On July 1, 2021, Mike DeWine signed the 2022 – 2021 budget (HB 110) into law, ending speculation around whether employees would be eligible for refunds on municipal taxes that were withheld for a municipality in which they neither lived nor worked. The bill clarifies that employees are eligible for a refund in the 2021 tax year, but does not provide guidance on refunds for the 2020 tax year.
The bill also provides clarity to employers regarding municipal tax withholding. Under the bill, employers are allowed, but not required, to continue withholding municipal income tax based on the employer location through the end of 2021. Beginning January 1, 2022, employers will be required to withhold municipal income tax at the employee work location.
*Original Post Below*
Changes may be coming to the way employers are required to withhold municipal taxes for their Ohio employees. We know unemployment fraud and FLSA changes are hot topics right now, and I imagine this will be as well. This matter is incredibly important for those involved in processing payroll.
At the outset of the COVID-19 pandemic, the Ohio legislature passed House Bill (HB) 197, which required employers to withhold municipal taxes from employees’ paychecks based on the physical location of the of the employer, even if employees were working remotely due to Covid-19 restrictions.
HB 197 continues to apply to payroll withholding as it is tied to Governor Mike DeWine’s state of emergency order (2020-01D) and is set to expire 30 days after the emergency order has been lifted.
HB 197 was designed to ensure that employers would not have to make modifications to the way their employees were set up in their payroll systems or modify their filing and remittance municipality for withholding taxes. It also allowed employers to avoid becoming subject to income tax in employees’ municipalities.
As many employees have continued to work remotely throughout the lengthy duration of the pandemic and emergency order, there has been a push to align municipal taxation with physical location.
Recently, Senate Bill (SB) 97 and HB 157 were introduced into the Ohio legislature to overturn the withholding provision and to repeal it sooner than 30 days after the termination of the state of emergency.
HB 157 would allow an employer to reassign employees and withhold municipal tax based on the municipality where the work is being performed, rather than at the employer location. Under the bill, employers would have until December 31, 2021, to make this change.
The bill would prohibit taxes, penalties, or interest from being imposed on wages that are taxed based on the employer location from March 9, 2020, through December 31, 2021.
The bill would align municipal taxation with historical judicial precedence. Ohio courts have generally found that a municipality cannot tax a non-resident’s income if the income has not been earned in that municipality and that a taxpayer would be entitled to a refund of municipal taxes withheld on income earned outside of the municipality.
If SB 97 and HB 157 are passed by the Ohio legislature, employers must be prepared to make changes to their payroll withholding, updating their records and payroll systems and remittance process to ensure that taxes are withheld for the municipality in which work is being performed.