A Taxing Issue – The Impact of Remote Work on Tax Withholding
One of the far-reaching early impacts of the pandemic was that millions of people went from working in an office every day to working from home – and while remote working was already well-established for a few organizations, for most it was a new frontier.
Recognizing that, and anticipating businesses and not-for-profit organizations already had enough on their plates trying to stay in business without wrestling with the tax implications of a remote workforce (and likely expecting the work from home practice to be temporary), the State of Ohio suspended the traditional principal place of work and the traditional 20-day rules for tax withholding with plans to reinstate the rules at a later date.
Fast-forward two years: It’s later.
For many, hybrid work is the new normal – and with massive talent shortages across virtually every industry, it’s here for the long haul. And now Ohio is reinstating the suspended rules. Here’s what that means for employers and employees.
Beginning in 2022, the traditional principal place of work and the traditional 20-day rule are reinstated in Ohio for income tax withholding purposes. Employers generally have a duty to withhold municipal income tax on qualifying wages paid to an employee based on where the employee is physically located and performing services, unless the employee performed twenty or fewer days of services in the municipal corporation (city). For a hybrid worker, that could mean the employer and employee are subject to two or more sets of employment laws.
Defining the principal place of work and the 20-day rule
Ohio defines the principal place of work as “the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis.” If the employee isn’t required to report for employment duties on a regular and ordinary basis to a fixed location, then the “principal place of work” means the worksite in the state to which the employee IS required to report on a regular and ordinary basis (even if that fixed location is your dining room table). If you want to dig into the details, see R.C. 718.011 (A) (7).
Under the 20-day rule, if, during a calendar year, an employee spends more than 20 days performing personal services in a municipal corporation (city), the employer is required to withhold and remit tax to that municipal corporation for any subsequent days in that calendar year on which the employer pays qualifying wages to the employee for personal services performed in that municipal corporation. (If the employer withholds tax based on the employee’s principal place of work during those first twenty days, those withholdings are refundable to the employee.)
The impact on hybrid workers
If the employee chooses to work in a different location, withholding must usually be made in both locations. (The employee may escape double taxation via credits paid to another city, up to limitations). So, if you’re hybrid working, you may be required to file local income tax returns in all the municipalities in which you work in 2022 and claim a credit for taxes paid to other cities, up to the limitations.
Employees may be entitled to a 2021 refund from all overpaid taxes if an employer continued to withhold Ohio local municipal income taxes at the employer’s location even though the employee was performing services in another jurisdiction – whether you’re an employer or an employee (or both) – consult your tax professional to ensure you’re not over- or under-paying. Refunds for 2020 were not included in this legislation.
Explore your situation
The pandemic has complicated our lives in so many ways – and here’s one where your CPA can make it simpler and give you peace of mind. Get in touch with one of our top tax pros for a free consultation. As always, we’re here to help.