CLEVELAND, Ohio – If you worked from home during last year’s pandemic, you could have a big reimbursement from the city of Cleveland.
As of Jan. 1, Ohio law changed and cities must return taxes paid for employees who have never worked within their borders. For some, that could mean a lot of money – up to 2.5% in Cleveland. For others, the savings might be non-existent.
The process is complicated.
How to proceed? Cleveland.com/The Plain Dealer asked experts to explain step by step what to do. However, it should be noted that every worker’s situation is a little different and the tips are strewn with caveats.
How does it work :
When people started working from home in large numbers in 2020, Ohio lawmakers passed a temporary rule that required businesses to withhold income taxes as they normally do – depending on the location where employees worked before the pandemic.
Amy Arrighi, chief legal counsel for the Ohio Regional Income Tax Agency, better known as RITA, said if a worker does not come into the office due to COVID-19 , employers and employees alike claimed they were still working in the office for tax purposes.
An Ohio House bill required employers to do so in 2020 and part of 2021, and businesses were allowed to continue to do so until the end of 2021.
Cuyahoga Community College tax professor John Bongorno described the situation using the example of “Jane Taxpayer”.
Before the pandemic, Jane reported to her company office in downtown Cleveland daily for a $ 40,000-a-year job. In 2021, she was instead working from her home in Suburb X. If her business continued to withhold taxes as if it had reported to its Cleveland office, Jane, under the new rules, could claim a refund from the City of Cleveland. She would then owe Suburb X money.
The difference between the two is where Jane could potentially save money.
But here’s where it gets tricky: Ohio municipalities all have their own tax rates and credits for taxes paid elsewhere, so Jane’s savings could be significantly more or less than her colleague, who lives in a different location, with a different tax rate and credit.
To help determine whether it is worthwhile to embark on the repayment and repayment process, taxpayers should consider the tax rates and credit amount of the home city, relative to the rates in their home city. city of work before the pandemic, as well as a few other factors like how often they worked from home.
Step 1: Should I request a refund?
According to Bongorno and Northeast Ohio tax preparers Dennis Linden of CBIZ, Hannah Prengler of Cohen & Co. and Olivia Ringler of Pease CPA, taxpayers will generally fall into one of three categories: the penalty of repaying and repaying; it is probably not worth it; and maybe worth it.
Probably worth it: Taxpayers who live in a canton (or one of the few municipalities) without local income tax. Also, those who live in municipalities that do not give credit for taxes paid elsewhere, such as South Euclid or Moreland Hills. These people, if their offices are in Cleveland or another municipality with income taxes, could earn all of the taxes paid to their work city before the pandemic. In Cleveland, this rate is 2.5%. So suppose Jane Taxpayer, earning $ 40,000, lives in Chagrin Falls Township or South Euclid and previously worked in an office in Cleveland – she could get 2.5% of her income back, or $ 1,000.
Probably not worth it: People who live and work in the same city will not gain or lose anything. This is also true for those who have previously reported working in Cleveland, but live in a city that shares the same tax rate as Cleveland and fully credits individuals for taxes paid elsewhere, like Maple Heights or Brooklyn. If it’s Jane, she could go through the process of refund and refund, but she would not gain any benefit from it.
Maybe worth it: Many people probably fall into this category, and those who do will have to use their own judgment as to whether the search for a refund is worth it. It generally applies to those who live in a municipality with its own income tax, and partial or full credit for taxes paid elsewhere.
Take Lakewood, which offers 0.5% credit, or University Heights, which offers 1% credit. If Jane lives in University Heights, she would get $ 1,000 back from Cleveland, but would lose her credit and owe her hometown $ 400 more, resulting in a gain of $ 600. If she lives in Lakewood, she will get $ 1,000 back from Cleveland and owe her hometown an additional $ 200, which will translate into a gain of $ 800.
Also in this category are, for example, residents living in a municipality with full credit and a tax rate below Cleveland’s 2.5% rate, such as North Olmsted (2% tax rate). Residents would earn the difference between the two rates – in Jane’s case, $ 200. Here’s a good rule of thumb from Prengler: The closer his home city’s tax rate is to his working city’s tax rate, the less he has to earn. Likewise, there is more to be gained if the tax rate in his home city is significantly lower than that in his working city.
Additional factors: Keep in mind that those who earn more money often have more to gain from the refund and refund process, and the benefits diminish for those who earn less. And don’t forget to reduce the potential earnings based on how often you worked from home versus how often you visited your office. This is especially important if a worker pays a tax preparer to take care of the paperwork for them. (If North Olmsted Jane showed up at her Cleveland office half the time and worked from home half the time, she’d only get $ 100. And if it cost her $ 100 to hire a tax professional, she wouldn’t earn anything. )
(A potential warning, from Ringler, for residents of cities that require residents to pay income taxes quarterly: New Ohio law does not specifically prohibit penalties for taxpayers who later get a refund from their working city and therefore under- paid on their previous quarterly estimates in their home city. While she suspects most cities wouldn’t penalize people retroactively, the law doesn’t outright prevent cities from doing so, Ringler said)
Step 2: request a refund
Professionals generally advise requesting a refund from the city of work as soon as possible, after you have received your W-2. This, ideally, would allow workers to obtain reimbursements before their invoices are due to their city of origin. (Otherwise, workers would have to remit money to their home municipality before being made whole or more than whole from their working city.)
Cleveland income tax collections are made through the Central Collection Agency, which has updated its reimbursement form for tax year 2021, and offers a new option for telecommuting employees who request reimbursement.
Remote workers requesting such a refund should choose option “C” on the form, the tax professionals said. This option requires reporters to include “supporting proof of claim” which may include, but is not limited to: “a telecommuting agreement, a summary of all telecommuting hours, regular hours, working hours. leave and a certificate from the employer verifying the number of days worked at the main workplace, etc.
Most professionals indicated that an employer’s certification is the key document needed to meet this need. (In fact, the text of the new state law explicitly only requires workers to include this information.) The certification must be on a piece of paper with the company’s official letterhead and signed by an HR professional or whoever handles payroll, or someone in a senior position, such as Vice President. It should include the number of days worked at the main office (and therefore, in a roundabout way, reflect the number of days worked at home – so it’s probably a good idea to explicitly list the number of those days as well.)
The other items, such as a telecommuting agreement and a summary of clock times, can be helpful in convincing the city to provide a refund. But professionals have said that employer certification is the most important item to provide. CCA officials did not respond to interview requests, asking for more details on the types of documents they will need to process the statements.
A remote worker whose office is in a city whose taxes are not managed by the CCA will likely need to apply for a refund through the Regional Income Tax Authority, or RITA, which manages taxes for many suburbs.
RITA updated reimbursement form seems to be more user-friendly than the CCA form. Taxpayers will select option “2” and follow the detailed instructions. Additional documents, other than a W-2, do not need to be attached, according to Arrighi. Instead, simply fill in the blanks in the “Log of Exits” section at the bottom of the form and have your employer complete the section called “Employer Certification”.
Step 3: File your normal tax return to settle with your city of residence
Tax professionals recommended filing normal returns (and settling with their home city, if they received a refund from their workplace city) after making the refund.
Prepare for potential bumps along the way, they said, and consider hiring an accountant if the going gets tough.
Step 4: What happens in 2022?
Businesses will have many layers and caveats to consider when determining which city local income taxes should be withheld. So much so that the Ohio Society of CPAs sent tax accountants a 25-page document, with 56 questions and answers, on how to handle withholding tax.
RITA administers taxes for approximately 350 municipalities. Companies file withholdings monthly or quarterly, and it will be a few months before the real changes become clear.
“The employers we hear about, they want to do it right,” Arrighi said, “and they offer reasonable methods of complying with the law, even if that doesn’t mean following it every day.”
Cleveland.com reporter Sean McDonnell contributed to this article.
Coming next week: Cleveland.com/The Plain Dealer will look at how employers are dealing with the new law.