Municipal Refunds?

When the pandemic came about in early 2020, it changed the landscape for several businesses.

Instead of coming into an office to perform their work, many employees were able to work from home via the internet and online meeting tools. Not all employees could take advantage of this due to the nature of their work, but for a sizable number, it was a big-time bonus.

Not only did it keep employees isolated during the height of the pandemic, but it kept their expenses down as well. No longer were traveling expenses of fuel, parking, tolls and other saved, but the time to commute was saved as well.

For a few interesting statistics: In the US, there are (as of 2019) 4,946 local income tax jurisdictions. Ohio ranks #2 in the total number of local tax jurisdiction with 848 taxing districts (Pennsylvania is #1 with 2,948). For the average amount of tax collected by local jurisdiction as a percentage of Adjusted Gross Income (AGI) in Ohio is 1.56% which makes it number one in percentage rates. (See graphic below)

tax by local per state

 

Prior to 2020, employees paid income taxes based on the office location assuming they performed their duties in the office. (There were some exceptions for travelling employees). In 2020, the legislature allowed for taxes to be collected by the cities in which the “normal” work location was situated whether the employee was in the office or working from home. There have been several lawsuits filed for work from home (WFH) employees to recover these taxes. To date, most courts have sided with the municipalities, but these have been appealed to the Ohio Supreme Court. Again, this is for tax year 2020.

In July 2021, the Ohio legislature passed a law allowing a WFH taxpayer to request a refund from the municipalities in which the “normal” work office is located. However, if the taxpayer lives in a municipality which imposes an income tax, then the taxpayer would owe income tax to this district based on the income excluded from the “normal” work location.

If a taxpayer lives in an area with no local municipal income tax, it will be worth the time to apply for the refund. Also, if the taxpayer lives in a municipality that gives a reduced credit for taxes paid to other cities, and/or if the home municipalities rates are less than the “normal” work locations rates, it may be well worth while to seek a refund.

In other circumstances where the home rate is the same or higher than the “normal” location, it may not be worth the time to apply for a refund. As you can see, the number of scenarios and complicated calculations can become quite cumbersome. And it will be necessary for the employee to account for the number of days worked at the “normal” location, the number of days for WFH, plus vacation, sick days personal days and any other paid days off to come up with a proper percentage.

If this all seems complicated, well it is. Since WFH may well continue pandemic or not, beginning as of January 1, 2022, employers will withhold based on the actual location of the employee rather than the “normal” location. An exception to this will be for employers with less than $500,000.00 revenue in the preceding tax year. They can elect to withhold for the “normal” location whether they have WFH employees