January 24, 22

NEWS / Ohio municipalities required to refund income tax to telecommuting workers

A change in Ohio State law now requires municipalities in the state to return income taxes withheld from telecommuting workers if they had not been physically present in the municipality while performing the work. The law reverses an earlier bill that allowed cities to continue taxing non-resident employees who had switched to working from home due to the COVID-19 pandemic. The update is welcome news for many Ohio residents working from home but may create budgetary issues for municipalities such as Columbus, Cleveland, and Cincinnati that relied heavily on municipal income taxes collected from commuters. Ohio is one of the few states that allows cities and villages to tax the income of residents and non-residents. Employers generally withhold income tax in municipalities in which work is performed, and residents are generally required to file a city/village income tax return in their city of residence. Some cities, such as Columbus and Cincinnati, only require filing if income tax was not fully withheld, while others, such as Cleveland, have mandatory filing for all adult residents even if they do not have any income. Many municipalities grant their residents credits for taxes paid to non-resident municipalities. Telecommuters are now advised to apply for a tax refund from the city in which they did not live or physically perform any work. This can be especially beneficial if they live in a municipality with a lower income tax rate than their employer’s municipality. Residents would thus be required to file with both their non-resident municipality and their resident municipality, in addition to filing form IT 1040 (and SD 100 if residing in school districts that impose an income tax) with the State of Ohio. Municipal income taxes are collected by the cities and villages themselves (as in the case of Columbus, Cincinnati, Toledo, and Akron) or collection agencies such as the Regional Income Tax Agency (RITA), which mostly collects income tax for smaller cities and villages throughout the state, and the Central Collection Agency (CCA), which mostly collects taxes in the Cleveland metropolitan area.