On Thursday, July 1, 2021, Governor Mike DeWine signed Am. Sub. House Bill 110 (HB 110) into law. Namely, the budget:
- Provides 2021 municipal income tax guidance to employers and remote workers;
- Exempts employment labor services and employment placement services from sales tax;
- Reduces personal income tax rates (Ohio top rate is now 3.99% versus 4.797%);
- Made no significant changes to the business income deduction, which offers many business owners a lower 3% tax rate on qualifying income; and
- Streamlined several incentive programs and extended or created several new incentive programs for taxpayers retaining or creating Ohio jobs.
1. Return to Work - Municipal Withholding Extension and Changes
As many employers are aware, Ohio’s emergency order ended June 18, 2021, and with that the withholding modification provided in the prior year’s HB 197 expires 30 days after, or July 18, 2021. To assist employers as they evaluate their post-COVID return to work procedures, HB 110 allows, but does not require, employers to extend the HB 197 withholding procedures through December 31, 2021. HB 197 passed last year required employers to continue to withhold at an employee’s principal place of work prior to the pandemic instead of the municipality where the employee was temporarily working. While this COVID modification was very beneficial to businesses experiencing a sudden shift to temporary worksites, effective January 1, 2022, employers will be required to revert back to the pre-COVID 20-day rule.
As a result, employers should carefully consider the state and local tax, administrative and legal costs of any proposed remote work plans.
>> Check our Events page for our upcoming state and local taxation webinar on teleworking considerations for employers on July 23.
While many businesses benefited from COVID withholding provisions, some employees were negatively impacted when transitioning their work duties to lower or no tax municipalities. HB 110 will allow employees to file refund claims with their principal place of work city for days they did not work within the withholding city during 2021 only.
Some legislators also wanted to extend the refund opportunity back to 2020, but ultimately decided to leave the 2020 employee municipal refund opportunity up to the courts. Several taxpayers have filed suit against Cleveland and Columbus, among other cities, to secure 2020 tax refunds for days that were not worked at their principal place of work due to Ohio’s stay-at-home order. It could take a year or more before a final decision is issued. As we wait for further 2020 guidance, employees may file protective refund claims if they believe a refund is due to the temporary municipal withholding provisions.
2. Significant Business Sales Tax Exemptions Repealed, Reinstated
Mark your calendars! Effective October 1, 2021, Ohio will repeal the sales and use tax on employment services and employment placement services. Ohio sales tax on temporary labor and headhunting services put Ohio employers at a disadvantage compared to their competitors in neighboring states that do not tax these services.
Ohio also reinstated the sales tax exemption on qualifying investments in metal bullion and coins, we believe effective for transactions occurring on or after October 1, 2021.
3. Impactful Individual Income Tax Reductions
Once again, Ohio will reduce the number of tax brackets and apply lower tax rates at each bracket. While most brackets see a 3% rate reduction, the most substantial reduction applies to taxpayers earning more than $110,650 with a rate reduction from 4.797% to the new 2021 top tax rate of 3.99%. Also, beginning in 2021 Ohio income tax is completely eliminated for those earning less than $25,000.
