Ohio municipal income tax creates real compliance challenges for employers with remote workers. Unlike most states, Ohio allows individual cities and villages to levy their own income taxes, and each municipality sets its own rates and filing requirements. When employees shift from a central office to home offices scattered across different cities, employers face new withholding obligations, additional tax filings, and potential income tax nexus in municipalities they have never dealt with before.
This article breaks down the Ohio withholding tax rules that apply to telecommuting arrangements, explains how the state’s 20-day threshold works, and outlines the steps employers should take before adopting permanent remote work policies.
How Ohio municipal income tax works for employers
Ohio is one of the few states where municipalities impose their own income taxes independent of the state. Hundreds of cities and villages in Ohio levy a local income tax, with rates that commonly range from 1% to 3%. The governing framework sits in Chapter 718 of the Ohio Revised Code, which standardizes many definitions while leaving rates and administration to each locality. Employers are responsible for withholding the correct municipal income tax from each employee’s wages based on where that employee performs work.
Under normal circumstances, most employers only need to worry about one municipality, the city where their office is located. If all employees report to a single location, the employer withholds tax for that one city and files accordingly. The system is straightforward when everyone works in the same place.
Remote work disrupts this simplicity. When an employee works from home in a different municipality, the employer may be required to withhold tax for that employee’s home city in addition to (or instead of) the city where the office sits. Multiply that by dozens of employees living in different cities, and the administrative burden grows quickly.
The Ohio 20-day rule and why it matters for remote work
Ohio law includes a threshold that determines when an employer’s withholding obligation kicks in for a new municipality. An employer must begin withholding municipal income tax for a given city once an employee works there for more than 20 days in a calendar year. This is commonly known as the 20-day rule.
For in-office workers, the 20-day rule rarely comes into play. Most employees exceed 20 days at their primary workplace within the first month of the year. But for employees who split time between a company office and a home office, or who work remotely full-time, the rule creates a ticking clock. Once a remote employee passes 20 days of working from their home municipality, the employer must start withholding tax for that city.
Tracking these days is the employer’s responsibility. There is no automatic reporting mechanism. Employers need a reliable system for recording where each employee works on any given day, especially when employees have flexible arrangements that shift between in-office and remote days throughout the year.
Ohio H.B. 197: The pandemic-era exception and its expiration
When COVID-19 forced widespread remote work in 2020, Ohio’s existing municipal tax framework threatened to create chaos for employers. Employees who had always worked in one city were suddenly telecommuting from homes in dozens of different municipalities, potentially triggering new withholding requirements overnight.
Governor DeWine signed Ohio H.B. 197 on March 27, 2020, to address this problem. The bill temporarily suspended the 20-day rule for the duration of the pandemic emergency. Under H.B. 197, employees working from home due to the Stay at Home order were treated as if they were still working at their employer’s principal place of business. This meant employers did not need to change withholding for any employee who shifted to remote work during the emergency.
As originally written, the relief in Section 29 of H.B. 197 was set to last for the emergency period plus 30 days after it ended. Ohio lifted the state of emergency on June 18, 2021, but lawmakers extended the temporary rule. Ohio H.B. 110, the state budget bill signed on July 1, 2021, continued the Section 29 treatment through December 31, 2021. During that window, no new municipal withholding obligations were triggered by pandemic-related telecommuting.
However, this was always a temporary measure. The temporary rule expired at the end of 2021, and the standard 20-day rule was reinstated effective January 1, 2022. Employers who continued to allow remote work after that point became subject to the standard rules again. Any employee still telecommuting from a different municipality needed to be tracked, and withholding needed to be updated once the threshold was crossed.
Ohio withholding tax obligations for telecommuting employees
When an employee works remotely from a municipality different from the employer’s principal place of business, the employer’s Ohio withholding tax obligations expand in several ways.
First, the employer must withhold municipal income tax for the employee’s home municipality once the 20-day threshold is exceeded. This applies whether the employee telecommutes full-time or splits time between home and the office. For split-time employees, the employer needs to apportion wages between the two locations and withhold the correct rate for each.
Second, the employer must register with the new municipality for withholding tax purposes. Each Ohio city has its own tax administrator: some use regional agencies like the Regional Income Tax Agency (RITA) or CCA, while others administer taxes independently. The registration process and filing frequency vary by municipality.
Third, employers should understand how tax credits work between municipalities. Ohio law generally allows employees to claim a credit against their resident city tax for taxes paid to the city where they work. When an employee works in two cities, the credit calculations become more complex, and errors can lead to over-withholding or under-withholding.
For example, consider an employer based in Cleveland with an employee who lives in Akron. If that employee works from home in Akron more than 20 days per year, the employer must begin withholding Akron municipal income tax on the wages earned while working from home. The employee may then claim a credit on their Akron return for taxes withheld by Cleveland on the days worked in the Cleveland office.
How remote work creates income tax nexus in Ohio
Beyond withholding obligations, remote employees can create an entirely separate tax problem for employers: municipal income tax nexus. Nexus is the legal connection between a business and a taxing jurisdiction that gives that jurisdiction the right to impose taxes on the business itself.
In Ohio, an employee working from home in a municipality for more than 20 days can establish income tax nexus for the employer in that municipality. This means the employer, not just the employee, may be required to file a municipal income tax return in the city where the employee lives.
Filing a business income tax return requires the employer to calculate how much of its total income is apportionable to that municipality. Ohio municipalities generally use a three-factor apportionment formula based on property, payroll, and sales. Employers need to be able to produce reports that allocate these factors to each municipality where they have nexus.
For businesses with a handful of remote workers in different cities, this can mean filing income tax returns in several new jurisdictions each year. The compliance cost, in terms of both accounting fees and internal administrative time, can be significant, especially for small and mid-sized employers who may not have dedicated tax departments.
This nexus risk is one of the most overlooked consequences of remote work policies. Many employers focus on the withholding side and miss the fact that they may also owe business income tax in cities they have never operated in before.
What Ohio employers should do before adopting remote work policies
Employers considering permanent remote work or hybrid arrangements for their Ohio-based employees should take several proactive steps to avoid unexpected tax liabilities.
Start by mapping where every remote employee lives. Identify which municipalities are involved and what their tax rates, filing requirements, and registration processes look like. This exercise alone can reveal whether a remote work policy is financially practical.
Implement a day-tracking system. Whether it is a simple spreadsheet or integrated time-tracking software, employers need a way to record how many days each employee works in each location. This is essential for determining when the 20-day threshold is crossed and for apportioning wages correctly.
Consult with a tax professional who understands Ohio municipal income tax. The rules vary between municipalities, and the interaction between credits, apportionment, and withholding can be intricate. Getting this wrong can result in penalties, employee complaints, and costly retroactive corrections. Pease Bell’s tax advisory services help employers model these obligations before they commit to a remote work policy.
Consider the total cost of compliance. Filing municipal income tax returns in multiple jurisdictions, registering for withholding tax in new cities, and tracking employee work locations all add administrative expense. For some employers, the cost may outweigh the benefits of a fully flexible remote work policy.
Finally, review your policy periodically. Ohio’s municipal tax landscape is not static. Legislative changes, court decisions, and municipal rate adjustments can all affect an employer’s obligations. Staying current is part of responsible remote work management, and ongoing accounting services can keep withholding and filings aligned as those rules shift.
Frequently Asked Questions
Do Ohio employers have to withhold municipal tax for remote workers?
Yes, Ohio employers must withhold municipal income tax for any municipality where an employee works more than 20 days in a calendar year. If an employee telecommutes from a home in a city different from the employer’s office, the employer is responsible for withholding tax for that city once the threshold is met.
What is the Ohio 20-day rule for municipal income tax?
The 20-day rule requires Ohio employers to begin withholding municipal income tax once an employee works more than 20 days in a municipality during a calendar year. This rule applies to each municipality separately, so an employee splitting time between an office and a home in different cities may trigger obligations in both locations.
How does working from home affect Ohio withholding tax?
Working from home can create new Ohio withholding tax obligations for employers. If a remote employee works from a municipality different from the employer’s principal office for more than 20 days, the employer must register and withhold tax in that municipality. Employers also need to track days worked at each location to apportion wages correctly.
Does remote work create an income tax nexus in Ohio?
Yes, an employee working from home in an Ohio municipality for more than 20 days can create income tax nexus for the employer in that city. This means the employer may need to file a municipal income tax return and apportion business income to that jurisdiction using property, payroll, and sales factors.
What was Ohio H.B. 197 and is it still in effect?
Ohio H.B. 197 was emergency legislation signed on March 27, 2020 that temporarily treated remote employees as if they were still working at their employer’s principal place of business during the COVID-19 pandemic. The relief was later extended by H.B. 110 through December 31, 2021. The standard 20-day rule was reinstated effective January 1, 2022, so normal rules now apply.
How do Ohio employers track municipal tax for telecommuting employees?
Ohio employers should implement a day-tracking system that records where each employee works on a daily basis. This can be done through time-tracking software, internal reporting tools, or manual logs. Accurate records are essential for determining when the 20-day threshold is crossed and for correctly apportioning wages between municipalities.
