A New Normal: Tax Implications of Employees Working From Home in Ohio
During these uncertain times businesses have been forced to evolve to survive. One aspect of this evolution is allowing employees to work from home. How does this abrupt change in employee work location affect Ohio employer withholding tax requirements today? And what are the long-term effects employers must consider before making permanent policy changes in the future?
Effect of H.B. 197
In response to the COVID-19 pandemic, employers have resorted to allowing employees to work from home or telework during Ohio’s Stay at Home order. Under normal circumstances, having employees work from home creates additional municipality withholding tax requirements for employers and municipal income tax nexuses for businesses.
Under Ohio law, employers are required to withhold income tax on wages if the employee performs services in a municipality more than twenty days in a calendar year. For most employers, employees are only functioning at the employers principal place of business, so they are only withholding tax for one municipality.
- Example: The employer has one principal place of business in Cleveland, OH where all employees report for work and none of their employees work for more than twenty days at any other location. The employer will only have a withholding tax requirement in Cleveland, OH.
As a result of Ohio’s Stay at Home order, employers now have many employees working from home in numerous municipalities exceeding the twenty day requirement for withholding tax. On March 27, 2020, Governor DeWine signed Ohio H.B. 197 into law. H.B. 197 temporarily suspends this twenty day rule. During the pandemic, employees working from home are considered to be working at their employer’s principal place of business. Furthermore, the bill extends the suspension of the twenty day requirement to thirty days after the order is lifted.
Example: The employer has a principal place of business in Cleveland, OH. During the emergency Stay at Home order, five employees are telecommuting from their homes which are all in different municipalities. The employer does not have to change any of the employees’ withholding tax during the order and for thirty days following the expiration of the order. After the thirty days are up, the employer is required to update withholding tax for the three of the employees that continue to telecommute, thus adding three new municipal withholding tax filings.
Many businesses are finding that employees are able to adequately complete their jobs from home and are considering implementing a permanent telecommuting or work from home policy for their employees once the Stay at Home order is lifted. Before adding a telecommuting or work from home policy, employers should exercise caution and keep in mind the additional employee withholding tax and employer income tax consequences that may arise.
Employee’s Withholding Tax: If the employee splits time between the employer’s principal place of business and their home, the employer will need to track how many days throughout the calendar year the employee works at each location in order to ensure that the employee’s withholding tax is done properly for both locations.
- Example: Entity A has one principal place of business in Cleveland, OH where nine out of ten employees report for work each day. They have one employee that works in the Cleveland office 90% of the time; the other 10% is spent working from home in Akron, OH. The employer will be required to withhold tax in Akron when the employee that is working from home has worked their twenty-first day in that municipality within that calendar year.
Employer Income Tax Nexus: An employee working from home for more than twenty-one days will create an income tax nexus in the municipality where the employee lives (assuming) the employee lives within a different municipality then the employer’s principal place of business). The employer will be required to start filing income tax returns in each qualifying municipality. In order for the employer to file these new income tax returns, the employer must be able to produce reports that show property, payroll, and sales to these new municipalities for apportionment purposes.
Written By: Olivia Ringler, CPA Manager | Tax Advisory Services