Potential refunds when working from home

While there certainly have been a lot of changes brought on by the pandemic, working from home might be the change that has impacted the most people. The intersection of taxes and working from home has certainly been an area of interest as a result of this and recently the state of Ohio has addressed a couple of issues in that arena.

Included in the recently enacted Ohio 2022-2023 budget legislation were some provisions that relate to municipal taxes and working from home. Through 2021, employers are allowed, but not required, to continue withholding municipal taxes based on where the employer is located. The law also specifically allows employees to request a refund for taxes paid to a municipality where they neither lived nor physically performed services for their employer in 2021. For employees that do not live in a jurisdiction with a municipal tax (townships and a handful of villages and cities), filing for a refund for time working from home will result in a savings of the entire refund amount. For those taxpayers working from home that do live in a municipality, a net refund opportunity may be available if a taxpayer lives in a city with a lower tax rate than the city where taxes are being withheld, or if the resident city doesn’t allow a credit for taxes paid to other cities. In these cases, a taxpayer can receive a refund of taxes withheld, but will need to pay tax to his or her resident city on the wages not taxed in the employer’s location.

Note: To be eligible for a refund, an employee must have worked from home for more than 20 days and can only request a refund for the days worked at home.

A few examples of how this might work for 2021 are as follows:

Example 1

Joe works for a company located in Cincinnati, which is where Joe’s primary office is located. Joe lives in Anderson Township and works from home for 50% of 2021. Joe’s taxable wages are $200,000 for 2021. Based on this example, only $100,000 of Joe’s wages should be taxed by Cincinnati. Assuming his employer withheld tax on all of his wages, Joe would be eligible for a refund from Cincinnati equal to $100,000 x 1.8% = $1,800. Since Anderson Township does not have an income tax, Joe does not owe any tax to a resident jurisdiction, so his total benefit if the full $1,800 refund.

Example 2

Same facts as above, except Joe lives in Montgomery. Montgomery has a 1% tax rate and allows for a full credit for taxes paid to other cities, up to the Montgomery tax rate of 1%. In this case, Joe can apply for and receive the same $1,800 refund from Cincinnati. Since Montgomery does have a local income tax, Joe will have to pay tax at 1% on the wages not taxed by Cincinnati. The net impact in this example is an $800 benefit, which is a refund from Cincinnati of $1,800 and tax due to Montgomery of $1,000 ($100,000 x 1%).