When the COVID-19 pandemic fervently came in March 2020 Ohio, like much of the United States, went on lockdown. As a result, employees were forced to pack up their computers and head home to work remotely.1 In 2021, a little more than half of the work force in Ohio was working remotely. Today, many employees continue to work entirely from home or in a hybrid situation (with at least one or two days a week remote). In fact, one third of the work force in Ohio are not expected to return to an office full time, even once the pandemic ends.2
For years, Ohio employers have withheld local income taxes from an employee, based upon the city where the employer’s office was located, with the assumption the employee was physically working from that same location. This continued to be the case throughout 2020 and 2021, even though many employees weren’t in the office.
Effective January 1, 2022, Ohio law has changed requiring employers to withhold local income taxes from an employee based upon where the employee is actually working, with certain exceptions.3 The new law also allows Ohioans to seek refunds of 2021 city income taxes withheld for a city they did not actually work in. If an employee worked remotely during 2021, he or she may be eligible for a refund.
There are several factors to consider when determining eligibility for a refund:
- The tax rates of the withholding city and city where the employee actually worked,
- The rate of credit the employer city may provide for the residence city,
- The amount of income, and
- Whether the employee was fully remote or more of a hybrid model.
Income tax rates vary widely throughout Ohio municipalities with some cities (and most townships) not assessing income tax at all. Based upon the Ohio Municipal Tax Rate Table
, approximately 7% of municipalities have rates 1% or lower. Only a quarter have rates 2% or higher. The tax rates for the majority of municipalities fall somewhere between 1-2%. Of those municipalities that do assess income taxes, the rate of credit given for taxes paid to another municipality also varies.
If working in one of those municipalities where the tax rate was 2% or higher, or maybe even 1.5% and higher, but residing in a municipality that either does not assess income taxes or where the tax rate is 1% or lower it is likely worth seeking a refund.4
When living and working in the same city, or when the rates for the city of residence is equal to or just slightly lower (say tenth or hundredth of a percentage point lower) than the employer’s city, it is likely not worth seeking a refund.
No matter which group, consider whether the residence city gives full, partial, or no credit for the income taxes paid to the city of the employer. If no or only partial credit is given, that may make it more worth seeking a refund, than if full credit is given.
Another factor to consider when determining if it is worth seeking a refund (particularly for those falling in the possibly worth it group) is a person’s earnings. The higher the income, the more a person stands to gain from seeking a refund of the taxes withheld only to then repay taxes to the municipality live/worked in.
Taxpayer 1 earning $100,000.00 has taxes withheld at a rate of 3% for City A, where her office is located. She resides/works in City B with a tax rate of 1% and is only given credit for taxes withheld for City A up to 1%. She seeks a refund from City A and receives $3,000.00. She then loses some, but not all, of that refund as she owes City B $1,000.00. The taxpayer still has a gain of $2,000.00.
In contrast, taxpayer 2 only earned $20,000.00. She would have received a refund of $600.00 from City A, only to turn around and pay City B $200.00, resulting in a net gain of only $400.00.
Finally, keep in mind that the number of days worked from home versus the number in the office affects any potential refund. For those that were not fully remote, working more of a hybrid model allows a possible refund only for those days worked from home.
To learn more about eligibility and to seek a refund of local income taxes, the best place to start is the website for the municipality for which taxes were withheld, and then checking the site for the residence city. A tax accountant or preparer may also be a good person to ask, for filing help. If you have additional questions, connect with attorney Jill Keck
at any time.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.