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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%).

Example 3

Same facts as example 2, except Joe lives in Cincinnati and works in Montgomery. While Joe can apply for and receive a refund from Montgomery for the days worked from his Cincinnati home, there is no net tax benefit to doing so. If Joe were to do nothing, he would have $2,000 of Montgomery tax withheld. His gross Cincinnati tax would be $3,600, but he would receive a credit of $2,000 for taxes paid to Montgomery, leaving him with an obligation to Cincinnati of $1,600. If he did file for a Montgomery refund, he would receive a $1,000 refund from Montgomery, but his credit for taxes paid to Montgomery in Cincinnati would be reduced by $1,000, so he would owe Cincinnati $2,600. Economically that leaves him in the exact same position while increasing his compliance requirements (if he doesn’t file for refund in Montgomery, he is not required to file a Montgomery return).

There has been a lot of discussion as to whether this opportunity does or should exist for 2020 as well. The legislation does not include any language relative to 2020. Currently the position of the cities is that no refund opportunity is available for 2020 for days worked from home, although that position is currently being challenged in court.

Based on this legislation, we definitely recommend tracking 2021 days worked by location for anyone where the withholding rate at their employer location is higher than their resident municipality or whose resident municipality doesn’t allow a credit (Indian Hill and Wyoming are a couple examples of cities that don’t allow a credit). While refund claims for 2020 are not currently being processed, we would also recommend assembling the days worked at home for 2020, as a refund opportunity may be available at a later date depending on the outcome of the various cases.

For 2022 and onward, the normal 20-day withholding rule will apply to where the employee is working. If an employee continues to work from home in 2022, and works less than 20 days in the employer’s office, he/she is not required to have municipal tax withheld from his/her employer’s municipality. If the employee exceeds 20 days in the office, but it is not their principal place of work, employers should withhold taxes for the employer’s municipality for just the number of days the employee has worked in the office. Employees whose principal place of work is at home are required to have taxes withheld to their home city. They may then apply for a refund from their home municipality equal to the credit for taxes paid to their employer’s municipality, if they exceeded 20 days and had taxes withheld in both municipalities.

As you can see from above, the pandemic has created some potentially favorable circumstances as it relates to municipal taxes. At Cassady Schiller, we are not only in tune with all of these developments today, but we were also in direct discussions with OSCPA leaders to help identify the issue and drive components of this legislation that we saw as beneficial to taxpayers. If you would like to discuss further how these provisions impact you, please feel free to reach out to your Cassady Schiller contact.

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