Did you work remotely during 2021? You may be eligible for a refund of city tax withheld on your wages.

The approval of the 2021-2022 fiscal year budget for the State of Ohio included a modification to H.B. 197. For the 2021 tax year only, remote workers living in a different city than that in which they worked prior to the pandemic can request a refund of taxes withheld for their work city. The amount eligible to be refunded is based upon the actual number of days worked “in the office.” Requesting a refund of city tax withholding may not be beneficial to all taxpayers, so it is important to understand how the Bill modification works.

Example A:

Jacob works for ABC Company. Prior to the pandemic, Jacob worked at the Company’s headquarters in Cleveland. Throughout 2021, Jacob worked from his home in Avon, and did not work any days in Cleveland. Throughout 2021, ABC Company continued to withhold Cleveland city tax on Jacob’s wages, despite his working each day in Avon. Jacob’s total wages for calendar year 2021 were $100,000. Cleveland’s income tax rate is 2.5%, so a total of $2,500 ($100,000 wages x 2.5%) of Cleveland tax was withheld from these wages.

Avon’s income tax rate is 1.75%. This means that Jacob would be required to pay $1,750 ($100,000 wages x 1.75%) on his wages to his resident municipality. Avon allows for a 100% credit of taxes paid to other cities, up to a maximum of 1.5% of wages, to be applied against his wage income. This means that up to 1.5% of city tax withheld and paid to another city on an Avon resident’s wages is eligible to be applied against his resident tax.

    $100,000              Jacob’s 2021 Wages

    1.50%                    Avon Credit Rate (Limit)

    $1,500                   Maximum Credit Allowed by Avon for Taxes Paid to other Cities in 2021

In tax years prior to 2020, Jacob would file a tax return for his resident city of and he would owe $250 to Avon (the difference between the $1,750 Avon city tax, and the maximum credit allowed for taxes paid to other cities of $1,500). For tax year 2021 only, Jason is eligible to request a refund of the full $2,500 city tax withheld for Cleveland since he did not work in the city at all during year, and would have to remit $1,750 of city tax to Avon.

Example B:

Using the same information as Example A, but switching Jacob’s work city to Avon and resident city to Cleveland, the results are not necessarily as beneficial.

Jacob’s employer withholds Avon taxes at $1,750 ($100,000 wages x 1.75%). Jacob lives in Cleveland, so he would owe $2,500 to his resident city ($100,000 wages x 2.5%). Fortunately, Cleveland allows for a 100% credit for taxes paid to other cities up to 2.5% (but not exceeding the amount actually withheld). In this instance, if Jacob does not request a refund from Avon of the tax withheld, this amount would reduce his resident tax owed to Cleveland by the full $1,750 withheld for Avon. Jacob would then owe $750 ($2,500-$1,750) to Cleveland when filing his tax return.

If Jacob were to request a refund of the $1,750 withheld to Avon, he would then be liable for the full amount to Cleveland of $2,500. Rather than requesting the refund and paying a higher amount to Cleveland and leaving the tax withheld with Avon, the need to file a refund request is eliminated and simplifies the preparation of his Cleveland tax return.

Rules established by individual cities or central tax agencies, such as the Regional Income Tax Agency (R.I.T.A.) or the Central Collection Agency (C.C.A.) may have different requirements by which remote workers may request a refund of tax withholding from their normal work city.

For example, R.I.T.A., requires that Form 10-A Request for Refund Claim (2021 version not yet released) must be completed with box #2 checked. Box #2 indicates that the taxpayer is eligible for a refund claim for days worked in a different location than their work city due to COVID-19. The employer must sign Part 2 of the Employer Certification included with Form 10-A attesting to information completed in Part I of the same section, as well as the Log of Days Out on page 3 of Form 10-A. Form W-2 is also required to be attached.

Some cities are only requiring a statement from the employer confirming the total number of days worked in the city for which tax was withheld (“in the office”) on wages to request the refund. This statement should be printed on the employer’s letterhead and be signed by an authorized representative. It is also recommended that a calculation be included with this statement supporting the amount of workplace city withholding that is requested to be refunded.

The modifications to H.B. 197 apply to tax year 2021 only. There is litigation currently pending in Franklin County regarding the application of the same Bill modification to tax year 2020. Once this lawsuit is settled, employees may be able to apply the same methodology of city tax withholding refunds to tax year 2020. 

The eligibility to request a refund for city tax withheld on wages lies solely with the employee; employers are not eligible for a refund of tax they withheld on employee wages.

While the ability for a remote worker to request a refund of city taxes withheld for a location in which they did not work every day during 2021 will be advantageous for many taxpayers, it may not be beneficial to everyone. It is important to discuss the modifications to H.B. 197 with your accountant to determine the best course of action for your particular situation.

Neitzel, Luke & Salopek, Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.