In this day and age, when employees are not necessarily stuck in an office, it can be difficult to understand what your local income tax withholding obligations may be for the employees of your company. If only it was as simple as withholding tax to a single location and filing a single return. However, recent statistics suggest that there are over 300 separate municipalities in the State of Ohio that have a local income tax. In addition, with the rise of employees working from home or co-working spaces it can be hard to know your obligations for withholding and remitting your employee’s local income taxes. Whether you have a few employees or hundreds, it can be difficult to understand when you have to withhold, how often you’re required to remit, and whether it matters where your employee is doing the work.
Therefore, let’s walk through what your local income tax withholding and remitting obligations are for the individuals that work for your organization.
Who Must Withhold?
Under Ohio law, each employer or agent of an employer (i.e. third-party payroll provider) is required to withhold from each employee. In addition, if an employer or agent is not required to withhold for an employee but an employee request withholding for the municipality in which the employee resides, then an employer may also withhold for that municipality.
What Must Be Withheld?
An employer should withhold from wages, salaries, and other compensation paid (i.e. bonuses, commissions, etc.) paid to an employee. Ohio and local municipalities most often follow the federal definition of wages as remunerations for services. However, if there are certain types of compensation that you provide to an employee that is outside of the “norm,” then it’s best to work with an appropriate tax professional to understand whether that compensation is subject to withholding.
When Do I Need to Withhold?
An employer is required to withhold from an employee’s wages anytime payment for remuneration for services is made to the employee. The employer or agent withholds an amount equal to the “wages” earned multiplied by the applicable income tax rate for that municipality. An employer withholds the applicable amount on the date that the employee is paid or has constructive receipt of the wages. Think of constructive receipt as when the employee was credited with the wages even if they didn’t actually receive the money at that time.
Under certain circumstances, an employer is not required to withhold; including if the services performed are for domestic services within a private home (i.e. a domestic employee, nanny, etc.), employee is receiving less than $300 in a calendar quarter for services that are regularly performed for that employer, or the employee is performing services that are not in the course of the employer’s regular trade or business and the cash payment is less than $50 or is paid in a medium other than cash.
Where Do I Withhold?
Employers are required to withhold and remit taxes to the municipality which is the employee’s “principal place of work.” In order to determine an employee’s “principal place of work,” an employer must go through a three-step test:
- It’s the location where an employee is required to report to work on a regular and usual basis (“Fixed Location”). If not applicable, proceed to Step 2.
- If no regular location, then it’s the worksite, within Ohio, that employee is required to work on a regular and usual basis (“Worksite”). If not applicable, proceed to Step 3.
- If neither Step 1 or Step 2 is applicable, then the location, within Ohio, in which the employee spends a majority of the calendar year performing services for the employer. If the number of days is equal then the employer must withhold and remit to the two or more municipalities.
However, Ohio carves out an exception from the normal rule for employers who qualify as a “small employer.” If an employer qualifies as a small employer than the employer is only required to withhold based upon the employer’s Fixed Location. A small employer is defined as an employer with a total revenue of less than $500,000.
In addition, an employer is not required to withhold and remit to a municipality if an employee will be working in the municipality for 20 days or less. Once the 20 days have passed then the employer is required to withhold and remit to that municipality for days 21 and beyond, unless the employee asks to retroactively withhold and remit for days 1-20. Finally, if the employee will be working in the municipality for less than 20 days then an employer may still be required to withhold and remit to that municipality if:
- The Employee’s principal place of work is in that municipality,
- It is reasonably expected that work at a Worksite location will last longer than 20 days, or
- The Employee resides in that municipality and requests the employer withhold and remit to that municipality.
How Often Do I Need to Remit?
In Ohio, the frequency of filing income tax withholding returns and frequency of payment is determined each calendar year based upon the total amount of state and school district taxes that were withheld or should have been withheld during last 12-months ending June 30th (called the “look-back” period). There are three payment frequencies:
1) Quarterly – Required if the total amount of taxes withheld or required to be withheld is $2,000 or less during the look-back period. If you’re a new employer, with no look-back period, then you will most likely be assigned a quarterly remittance schedule. An employer is required to remit the withheld taxes by the last day of the month following the end of each quarter.
2) Monthly – Required if the total amount of taxes withheld or required to be withheld is greater than $2,000 but less than $84,000 during the look-back period. An employer is required to remit the withheld taxes within 15 days following the end of the month.
3) Partial-Weekly – Required if the total amount of taxes withheld or required to be withheld is greater than $84,000. An employer is required to remit the withheld taxes within 3 business days from the end of the partial-weekly period.
It’s important to note, that if an employer, whether on a remittance schedule of quarterly, monthly, or partial-weekly, must remit, within one business day, if the total amount of taxes withheld equals or exceeds $100,000.
Local income tax withholding is not necessarily the most exciting topic but it can be one that creates great confusion for employers. Some key takeaways are that if you are a small employer, as defined by statute, then you are only required to withhold to the location in which you have a fixed location. If your employees work at multiple locations then you need to go through the steps to determine where you need to withhold and remit taxes.
For Columbus small business legal advice and help with complex business tax issues please contact Demetrius Robinson.
175 S. Third Street, Ste. 200
Columbus, Ohio 43215
This article was written by Robinson Legal Group LTD © 2019 Robinson Legal Group, Ltd.