Work from home and taxes: Refunds for some taxpayers, losses for cities

Many haven’t had the option to work from home during the COVID-19 pandemic. But others, particularly with office jobs, did, and many companies generally found it worked well.

Repeated COVID-19 surges delayed return-to-work plans, and some companies, including Synchrony Financial, which employed 1,900 at its former Kettering office, decided to go remote permanently.

No one knows how many work from home. That will become more clear once people file tax returns for 2021, and refund requests start rolling in from those whose employers withheld taxes at the company’s location but they actually worked from home or some other remote location.

The big winners will be people who paid local taxes where their companies were located but actually worked from home in townships or municipalities with no or lower income taxes. They can apply for refunds, but if they do, they must pay what is due to their home city.

It gets complicated for hybrid workers who split their time between the office and home in 2021. Those hours need to have been tracked and certified by the company to get a refund from the workplace city, and the refund would be only for the portion of time worked at home.

“The law basically says the tax is due where the work is done,” said Amy Arrighi, chief legal counsel for the Regional Income Tax Agency, which administers income taxes for about 356 cities and villages in Ohio.

More than 600 of the state’s 940 cities and villages levy a municipal tax, with workers paying an income tax and businesses a net profits tax. The state’s 1,300 townships cannot levy income taxes.

About $6 billion in municipal taxes are collected annually, Scarrett said, and that tax covers 70% to 80% of municipalities’ general operating revenues for services like police and fire, public works, trash and recreation.

“Municipalities of all sizes are concerned about how this might shake out,” said Arrighi. “If you think about a small municipality with one large employer that drives their tax dollars and suddenly sends everyone home or has them at home part of the time, that could have an impact. It’s not just a big city issue.”

Where you owe taxes

Under Ohio law a company withholds local income taxes from employees’ paychecks for the city where it’s located. If the employee lives somewhere else, the employee must also pay that income tax, unless their home city offers a credit for taxes paid to another city.

Many local jurisdictions offer those credits, typically for half or all of the taxes paid where the employee works.

For example, Dayton has a 2.5% income tax rate and Kettering a 2.25%. A person who lives in Kettering and works in Dayton gets 100% credit from Kettering for taxes paid to Dayton and does not owe anything to Kettering.

The workplace cities do not share any of the money with the home city.

Prior to the COVID-19 pandemic, companies whose employees worked off site for more than 20 days were required to also withhold taxes for those locations.

Companies with annual revenues of less than $500,000 were allowed to simply withhold in the company’s city, and employees who worked off-site were responsible for applying for refunds and paying taxes where they actually worked.

Companies with a remote workforce knew the rules and had systems set up to comply, said John Parks, shareholder and certified public accountant at Clark Schaefer Hackett in Miami Twp. and a member of the Dayton Daily News Community Advisory Board.

After the pandemic shutdown in March 2020, Ohio passed emergency rules allowing companies who sent employees home to work to continue withholding income taxes where the company was located, allowing the cities to continue getting that revenue.

Last summer, before that emergency rule expired, the legislature passed a law permitting companies to continue that withholding practice through Dec. 31, but said pre-pandemic rules would return in 2022. Businesses must now track where employees work, and withhold taxes and pay net profits taxes in those locations.

“A lot of people think this is a new law. But it’s been around for years,” said Greg Saul, director of tax policy for the Ohio Society of CPAs. “A lot of people in an office setting are seeing it for the first time.”

The legislature left it up to the employee who worked from home in 2021 to apply for a refund from the work city and then to pay the home city any taxes owed, Arrighi said.

“Nothing in the law says that a taxpayer has to request that refund,” she said.

And the home city also is not allowed to force the taxpayer to get a refund and then pay their home city tax for 2021, Arrighi added.

Work-from-home employees are not eligible for refunds for 2020, but Arrighi said RITA has about 1,700 refund requests that are being held pending court challenges.

What will be the impact on cities?

The state’s tax withholding emergency rule for 2020 was upheld in a 10th District Court of Appeals ruling last year. But the Buckeye Institute, the Columbus-based conservative think tank that filed the lawsuit, recently appealed to the Ohio Supreme Court in an effort to overturn the law and force cities to refund money to taxpayers who worked from home.

“It would be catastrophic, not just for Dayton, but for all of the large cities because of the shutdown period and the extent of work from home that occurred in 2020,” Dayton City Manager Shelley Dickstein said.

Dayton already anticipates losing $35 million in income tax revenue over the next three years due to people working from home. Looking just at employment in the office-heavy downtown district, Dickstein estimated the city would pay out an additional $40 million to those workers if forced to do refunds for 2020.

“In 2022 we’d essentially have all of our (COVID) rescue funds go to people who generally increased their wealth during this pandemic, and we would not be able to do the kind of investments into our neighborhoods and address the true impact of COVID on our poor and disenfranchised communities,” Dickstein said.

A study of 10 Ohio cities, including Dayton, Kettering and Springfield, projects that about one-third of the workforce could continue to work from home either full-time or on a hybrid basis, said Keary McCarthy, executive director of the Ohio Mayors Alliance, which commissioned the study.

The study projects a possible loss of annual municipal tax revenue as high as $21.9 million for Dayton, $6.4 million for Kettering and $4 million for Springfield, according to the October report.

“The concern is about the long-term impacts on municipal budgets as a result of a big shift to remote working,” McCarthy said.

Some cities, like Kettering, will see revenues increase as residents who formerly commuted now work from home. But Kettering has a lot of businesses as well, and will lose revenue from nonresidents who no longer come to work there.

“At this point, we have estimated as much as $2 million to $3 million negative impact due to the work from home,” Kettering City Manager Mark Schwieterman said. “However, we will have a better idea of the actual impact after we receive and process the refunds from 2021 related to the work from home.”

Scarrett said the decline in income tax revenue caused by work-from-home already has some cities renegotiating incentive packages they gave companies to locate there. Those packages are typically based on anticipation of income tax revenue.

“There will definitely be an impact on future incentive programs and economic development agreements with businesses,” he said. “And I think there will be an impact on existing agreements.”

Businesses have concerns

The Dayton Area Chamber of Commerce held municipal income tax roundtables with members and heard concerns about implementing new withholding and tracking systems for remote workers, said Stephanie Keinath, chamber vice president of strategic initiatives.

Employers wanted information on how to verify where a remote employee was actually located, she said, because some might choose to work somewhere other than their home, and to minimize the companies’ liability in that verification process.

“The municipal income tax system in Ohio is extremely complex, and employers who operated (pre-pandemic) in multiple jurisdictions shared how complicated the tracking and withholding processes could be, even for those with smaller teams,” Keinath said.

Many employers have not made permanent workforce shifts, she said, but “there may indeed be long-term shifts to where and how employees are working.”

“Flexibility for employers and minimizing the administrative burden has been key to the debate around municipal income tax reform,” Keinath said.

The Buckeye Institute opposes the municipal income tax as outmoded. It says those taxes “discourage work and productivity,” and are susceptible to a volatile labor market and broader use of telecommuting, according to the group’s new report on funding cities.

“Moving away from local income taxes and toward a property or sales tax regime will take time and planning, and will not be easy,” according to the report, which also recommends cities reduce spending.

Some caution that any change should be carefully thought out, because it remains unknown how much remote work will continue when the pandemic ends.

Zach Schiller, research director at Policy Matters Ohio, a Columbus-based liberal think tank, said lawmakers should start by restoring cuts to the local government fund they made a decade ago.

“We should also broaden the municipal income tax to cover unearned income — dividends, capital gains from stock, etc.,” Schiller said. “We should not take steps that will heighten inequality and put more of a load on those who are least able to pay.”

Tips for taxpayers

Look at city websites for tax refund applications and apply early.

Taxes are due April 18. Apply for an extension if you need to have your refund in hand before you can pay your home city.

Applying for a refund is voluntary in 2021, but if you get one, you must pay your home city.

The municipalities share information about who has received refunds.

To determine your taxing district, check the State of Ohio Department of Taxation’s The Finder website.

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