Ohio Municipal Income Tax 20-Day Rule for Out-of-State Crews

What is Ohio's 20-day rule for municipal income tax?

An employer does not have to withhold an Ohio city's income tax for an employee who works in that city on 20 days or fewer in a calendar year (ORC 718.011(B)(1)). This occasional entrant exception does not apply when:

• Presumed worksite. The employee worked at a construction site or other temporary worksite where, when work began, the employer reasonably expected its own services to last more than 20 days that year, because the job needs it or the contract requires it.
• Principal place of work. The employee's principal place of work is in the city.
• Resident request. The employee lives in the city and asked the employer to withhold.

For a nonresident, wages under the 20-day rule are also exempt from that city's tax, but never from the tax of the city where the employee lives (ORC 718.01(C)(16)).

How the city taxes fit with the other Ohio taxes on the same job:

Ohio school district income tax is a separate tax and is not covered here.

Why do most data center builds need city withholding from day one?

A data center build is a construction site where a contractor usually expects to work for months, so it is a presumed worksite from the start. The test looks at the employer's own expected days of service at the site, not at each worker's days (ORC 718.011(B)(1)(b)). Rotating crews so no one passes 20 days does not avoid it.

The 20-day rule can help short commissioning, startup and warranty visits, where the company's own work at the site is expected to take 20 days or less, but only if the city is not the employee's principal place of work (below).

Two rules can take the 20-day relief away even on short visits:

• Related companies may count together. For this rule, "employer" includes a related member of the employer (ORC 718.011(A)(1)). A foreign parent's engineers and its US subsidiary's crew at the same site may count as one employer. Confirm with the city.
• The site can become the principal place of work. A company with no permanent Ohio office has no "fixed location" there. An employee who must report to the Ohio site on a regular and ordinary basis can make that site the principal place of work, and the relief is gone for that city. If an employee reports regularly to neither an Ohio office nor an Ohio site, the principal place of work is the Ohio location where they work the most days that year, so even an engineer on short visits has one (ORC 718.011(A)(5)-(7)). The 20-day relief does not apply in that city, and in other cities it applies only if the employer withholds those days' wages for the principal-place city (ORC 718.011(C)). How cities apply this to employers with no Ohio office varies; confirm with the city or its collector.

How do we count an employee's days in each Ohio city?

Count per employee, per city, per calendar year, restarting on January 1. Two short jobs at two campuses in the same city add together.

A day counts for a city only if the employee worked more time in that city than in any other city that day. Travel to the first job of the day, and travel between jobs, counts as time at the principal place of work, not at the site (ORC 718.011(B)(2)).

Keep records that prove it:

• A daily log per employee naming the site and city worked, backed by site badge or access records and timesheets
• Travel days
• The contract terms showing how long the company's work at each site was expected to take
• Each city's registration, payment and filing confirmations

What happens on day 21: do we withhold for the first 20 days too?

From the 21st day in a city, the employer must withhold that city's tax for each later day it pays the employee for work there (ORC 718.011(D)). The first 20 days stay unwithheld.

The employer may instead elect to withhold for the first 20 days too. If it does, those wages lose the nonresident exemption (ORC 718.01(C)(16)(c)), and any tax withheld for those days to the employee's principal-place-of-work city is refundable to the employee.

We have no office in Ohio: which city do we withhold for, and where do we register?

Withhold for the city, village or joint economic development district where the work is physically done. A mailing address or ZIP code does not settle it: New Albany's tax page warns that a New Albany mailing address can sit in Plain Township or Columbus (City of New Albany). Look up each site's street address in the state's Finder and confirm with the city.

A site can sit in a joint economic development district, which can levy an income tax under the same rules, collected by a member city (ORC 715.72(F)(5)).

Each city collects its own tax or uses a collection agency. New Albany's rate is 2.0%, collected by the Regional Income Tax Agency (City of New Albany). Rates differ by city and change; take each from the city or The Finder. Register as a withholding employer with the city or its collector before the first payday that includes Ohio work. One collector account covers its member cities; a city that collects its own tax needs its own account.

For a crew member who lives in another Ohio city, the employer withholds for the work city and may also withhold for the home city if the employee asks (ORC 718.03(A)(2)).

Which wages are subject to Ohio city withholding?

Qualifying wages: wages for federal Medicare tax, with no wage cap, less amounts under a section 125 cafeteria plan, with 401(k) deferrals included (ORC 718.01(R)). An employer with an Ohio fixed location and less than $500,000 of total revenue in the prior year withholds only for its fixed-location city (ORC 718.011(E)); a company with no Ohio office rarely fits.

When are city withholding payments and the annual reconciliation due?

Payments are monthly or quarterly, by city (ORC 718.03(B)):

A city can require larger employers to pay semimonthly, and employers that pay federal withholding electronically to pay it electronically; check each city's rules.

What if we didn't withhold Ohio city tax?

The employer owes the tax it should have withheld, whether or not it withheld it (ORC 718.03(G)). The officer or employee responsible for payroll is personally liable, even after the company dissolves (ORC 718.03(I)). A city can sue within three years after a return was due or filed, whichever is later, so an unfiled return stays open (ORC 718.12(A)). The worker still owes tax that was never withheld (ORC 718.03(E)(1)).

A city may charge (ORC 718.27):

• A penalty of up to 50% of unpaid withholding
• Up to $25 for each late return; the first is abated once the return is filed
• Interest at the federal short-term rate plus 5%, reset each calendar year

To fix it, register, file the missed withholding returns and reconciliations, and pay. A city may abate penalties and interest. If a collector sends a non-filing letter, answer it (City of New Albany).

Does the job make our company file an Ohio city net profit return?

Usually, yes. A city taxes its share of the net profit of a company doing business both inside and outside it. The share is the average of three ratios (ORC 718.02):

• Property: original cost of property owned or used in the city, with rented property valued at 8 times its annual rent
• Payroll: wages for work in the city, leaving out wages exempt from withholding under the 20-day rule
• Gross receipts: installation, commissioning and service receipts count where the work is performed. Equipment shipped in from out of state counts only if it was delivered from stock in the city, or the company regularly solicits sales there through its own employees and the sale resulted.

Months of crew work on site usually create a filing; a few exempt short visits may not. Some cities require a return from every business operating within the city, New Albany among them (City of New Albany). A return is due even when the tax is under $10 (ORC 718.05(H)).

Who pays depends on the entity (ORC 718.01):

• Corporations and pass-through entities (partnerships, LLCs taxed as partnerships, S corporations) pay at the entity level. A pass-through computes net profit as if it were a C corporation, with no deduction for guaranteed payments to partners. Nonresident owners are not taxed by the city on their shares.
• A disregarded entity's profit goes on its owner's return.
• Individual installers paid as contractors owe their own city tax, not the company; whether they should be on payroll is covered in contractors who may be employees.

Losses carry forward five years. Whether a foreign company with no US subsidiary, exempt from federal tax under a treaty, owes city net profit tax is not settled by the statute, since net profit starts from adjusted federal taxable income; that case needs a CPA's review.

Can we file one municipal net profit return with the state instead of each city?

Yes, if the company is a corporation or pass-through entity. It can elect to have the Ohio Department of Taxation administer its municipal net profit tax: one return on the Ohio Business Gateway covers every city, including joint economic development districts and zones, and all payments go to the state (ODT: Municipal Net Profit Tax). Sole proprietors and disregarded entities cannot elect.

• Deadline: the 15th day of the 4th month of the taxable year, April 15 for a calendar year (ORC 718.80(B)). The Gateway refuses a late election, which then applies to the next year.
• Term: the election renews each year until the company terminates it by the same date.
• Registration: needs a federal employer identification number; there is no fee.

The election covers the net profit tax. City withholding continues with each city or its collector.

When is the net profit return due, and do we owe estimated payments?

A company's net profit return is due the 15th day of the 4th month after its year-end, April 15 for a calendar year. A federal extension extends it automatically to the 15th day of the 11th month, but not the time to pay (ORC 718.05(G)). A company without a federal extension can ask the city for a six-month extension by the due date. The same dates apply under the state election (ORC 718.85).

A company owes estimated payments when the estimated tax is at least $200 (ORC 718.08). In its first year subject to a city's tax, the declaration is due by the 15th day of the 4th month after it first became subject (ORC 718.08(B)(3)). Under the state election, the test uses the combined tax for all cities and the payments go to the Department of Taxation (ORC 718.88). Payments are cumulative shares of the year's tax:

Underpaid tax can draw a penalty of 15% plus interest (ORC 718.27). Paying at least the prior year's tax avoids the penalty only if a full-year return was filed with that city for the prior year, so a first Ohio job cannot use that test. The other way is to pay at least 90% of the tax on income annualized to date (ORC 718.08(E)).

The job is over: how do we stop the city filings?

File the net profit return for the last year of work. For the next year, send each city a signed affidavit, under penalty of perjury, stating where the worksite was, the last day the company worked or sold there, and that it plans no work or sales in the city that year. The city then cannot require a return for that next year unless it holds conflicting information or the facts change (ORC 718.05(N)). File the final withholding reconciliation and close each withholding account.

Do our workers have to file their own Ohio city tax returns?

Usually not, if their only city-taxable income is wages withheld correctly. The employer's withholding return counts as the employee's return unless the city requires all individuals to file (ORC 718.03(C)). Over-withheld employees claim refunds from the city. An Ohio resident's home city decides by ordinance whether to credit tax paid to the work city (ORC 718.04(D)). How a worker's home state or Canada treats Ohio city tax is covered in employees in another state and Canadian employee working in the US.

Example

All figures are in US dollars and illustrative only.

An electrical crew on a four-month build

A Texas electrical contractor, a C corporation with a calendar year, sends 12 electricians to a data center build in New Albany from March to June. The subcontract requires about four months on site, so the site is a presumed worksite and New Albany's 2.0% is withheld from the first day: $480,000 of qualifying wages, $9,600 withheld.

• It registers with the city's collector before the first payday.
• March falls in the first quarter, with no earlier history, so March's withholding is paid quarterly by April 30.
• March's withholding exceeded $200, so April, May and June are paid monthly, each by the 15th of the next month.
• The annual reconciliation is due by the end of the following February.

A field engineer on short visits

A cooling-unit maker's US subsidiary, owned by a Canadian parent, sends a field engineer who lives in Illinois. She spends 12 days on a startup visit at a New Albany campus and 10 days at a Columbus site; the subsidiary expected its own work at each site to take under 20 days. A 10-day warranty call in November at a second New Albany campus brings her New Albany total to 22 days.

The subsidiary has no Ohio office and she reports regularly to no Ohio site, so by the statute's wording her principal place of work is the Ohio location where she works the most days in the year: here, New Albany. If that holds, New Albany's 20-day relief does not apply, and her Columbus days stay free of Columbus tax only if those wages are withheld for New Albany. Because the answer turns on a year-end day count and on how each city reads the rule, the subsidiary asks the collector for its position in writing before the first visit.

The contractor's net profit return

The Texas contractor's net profit for the year is $3,000,000. New Albany holds:

Apportioned profit is $120,000, and New Albany tax at 2.0% is $2,400. That is $200 or more, so the company owes estimated payments; work began in March, its first year in the city, so the declaration is due by July 15. The return is due April 15 of the following year, or November 15 with a federal extension; payment is still due April 15.

It did not elect state administration, so it files with the city's collector. With no Ohio work planned next year, it files the worksite affidavit for that year.

Different for you?

• Ohio state withholding and unemployment tax for the same crew: employees in another state
• Engineers sent by a company abroad: sending employees from abroad to the US
• Canadian employers and their staff: sending employees to work in the US and Canadian employee working in the US
• Ohio's commercial activity tax: gross receipts taxes in other states
• State income or franchise tax from the work: business income tax in other states
• Registering with Ohio's Secretary of State: registering in another state
• Sales tax on installing cooling, switchgear or power equipment: sales tax on installed cooling and power equipment
• Missed withholding, several Ohio cities, related companies on one site, or a foreign company with no US subsidiary: these change the withholding and the exposure; see data center tax services

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