Recent legislation passed in Ohio changes the rules for when an employer must withhold municipal income tax for its employees. The old “12 day rule” continues to apply through 12/31/15, but as of 1/1/2016 the new “20 day rule” applies. Best of all, no retroactive withholding is required!
The new general rule provides that an employer need not withhold tax for a municipality if the employee is working in the municipality on 20 or fewer days. A “day” is equivalent to the largest amount of time spent at one worksite in a calendar, 24-hour day. An employee can only be considered to be in one municipality per calendar day.
The employer is always required to withhold municipal income tax for each employee’s principal place of work. The challenge is to identify and track additional municipalities in which the employee works for more than 20 days. When making this determination, travel time is always deemed to be performed in the principal place of work municipality (travel to first work site, between work sites, from last work site to principal place of work, etc.).
The employee’s principal place of work is determined using a cascading test:
- Does the employee have a fixed location to which he/she is required to report for employment duties on a regular and ordinary basis? Is this fixed location a location of the employer in Ohio? If so, this is the employee’s principal place of work. If the answer to either question is “no”, go to step 2.
- Does the employee report to a construction or other temporary worksite in Ohio at which the employer provides services on more than 20 days during the calendar year? Is this worksite somewhere other than the employee’s home? If the answer to either question is “no”, go to step 3.
- If neither step 1 or 2 applies, then the principal place of work is the location in Ohio at which the employee spends the greatest number of days in the calendar year performing services for, or on behalf of, the employer. This site can be a customer owned location. However, if there is a tie, meaning that the exact same number of days is spent at two or more worksites in the same calendar year, the employer must allocate the employee’s wages among those two or more municipalities for withholding tax purposes.
The law also allows for a presumed worksite location. This is a construction or other temporary worksite in Ohio at which the employer provides services that can reasonably be expected by the employer to last more than 20 days in a calendar year. Services can be reasonably expected to last more than 20 days if either the services cannot be completed in 20 days or the agreement between the employer and customer requires services to be performed for more than 20 days.
Let’s do an example: Assume that Mike works in Blue Ash for 15 days, has his principal place of work (i.e. office) in Cincinnati, and resides in Batavia. Each of these cities imposes an income tax. Mike’s employer must withhold Cincinnati tax for the 15 Blue Ash days since the 20 day rule has not been met. Mike will not owe any tax to Blue Ash.
However, if Mike asks Cincinnati for a refund of tax for the 15 days he worked in Blue Ash, the employee loses the benefit of the 20 day rule and those 15 days become subject to tax in Blue Ash. Employees need to be made aware of this part of the new rules.
Once an employee exceeds 20 days, the employer must withhold tax to that municipality for any additional days on which the employee provides services in that municipality. An employer, may elect, but is not required, to withhold retroactively back to day #1. If the election is made, the amount withheld to the principal place of work for those same days are refundable. To continue the previous example, if Mike works an additional 7 days in Blue Ash before the end of the calendar year, even at another of the employer’s worksites, then the employer needs to begin withholding for Blue Ash on day 21 unless the retroactive election is made. If the election is made, withholding is done retroactively for the first 20 days Mike worked in Blue Ash and the tax previously withheld for those same 20 days in Cincinnati is refunded.
Small employers are not subject to the 20 day rule at all and must only withhold tax on employees to the small employer’s fixed location. A small employer means any employer that had less than $500,000 of total revenue during the last taxable year.
Of course, as with any change, the devil is in the details. Documentation will be important to supporting when and where an employer withholds. Feel free to contact me to discuss the specifics of implementing these changes for your business.
