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Hybrid Work Arrangements and Ohio Municipal Withholding Update

12/23/2021 Robin Teeters

While the pandemic continues to impact our daily lives, some things are going back to the pre-COVID norms. The general Ohio municipal withholding tax rule states that employers must withhold based on where an employee’s work is actually performed, unless an exception applies.  One of those exceptions is the 20-day, occasional entrant rule which shields an employer from a withholding requirement until an employee has worked in a municipality for 20 days.  That rule had been suspended during the pandemic but will be reinstated as of 1/1/2022.  See our previous article about that rule here.  Please note that the principal place of work concept only applies in the context of the occasional entrant rules and NOT to hybrid work arrangements that lay out a schedule of work between an employee’s place of residence (“home city”) and employer’s location (“work city”).  If more cities are involved, the exception might apply.

There is more good news!  Refunds of taxes paid to a city other than where the work was actually performed are available for 2021.  The taxpayer files this refund claim with the municipality.  See our previous article here for more details on employer certification requirements.

There is some bad news, however, in that it is still unclear if refunds of taxes paid to a city other than where the work was actually performed are available for 2020.  Litigation is still pending.

Potential next steps for employers include:

  1. Document the work arrangement for each employee at the beginning of the year using estimates of time spent in different locations.
  2. Update company internal policies to require employees to notify the employer of significant changes to those estimates and to retain records of estimated payments made, returns filed, etc. The employee’s records may need to be shared with the employer to defend an audit.
  3. Re-evaluate the company’s Ohio Net Profits filing obligations based upon employee estimates. Keep in mind that the deadline for signing up for centralized filing of net profits tax for 2022 is April 15, 2022.  This allows the estimated payments and returns to be filed via the same state managed process.
  4. If possible, use company systems to track the actual places of work for employees during the year.

For any questions or guidance related to the Ohio Municipal Withholding Update, or State and Local Tax consultation in general, please contact Robin Teeters at rteeters@vlcpa.com or 859.331.3300.

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