1. CATA Tax Workshop – 2/3/2016 Withholding Under HB 5 Effective Date – 1/1/2016 Scott D. Gill, City of Grandview Heights Jeffrey P. Sherman, Regional Income Tax Agency Modified From a Presentation by Richard Donnelly, Regional Income Tax Agency 1

2. Disclaimer The following materials are for educational/ demonstration purposes only. These materials are not to be construed or relied upon as legal or tax preparation advice. 2

3. What was the intent of HB 5? 1. Align local tax system to FED & OH systems 2. Reduce compliance costs for taxpayers 3. Substantial revenue neutrality to the local tax system (aggregate) - no intent to reduce the tax burden itself 3

4. Withholding Uniformity: The Good News Effective January 1, 2016, ORC 718.03(B) established uniform due dates Effective January 1, 2016, ORC 718.03(B) established uniform due dates  Quarterly: o <$2,400 annually and/or <$200 in any month o payment & return due 15 th of following month o Mailbox rule applies (postmark) 4

5. Withholding Uniformity: The Good News Effective January 1, 2016, ORC 718.03(B) established uniform due dates Effective January 1, 2016, ORC 718.03(B) established uniform due dates  Monthly: o <$12,000 annually and/or <$1,000 in any month o payment & return due 15 th of following month o Must be received @ muni by due date 5

6. Withholding Uniformity: The Good News Effective January 1, 2016, ORC 718.03(B) established uniform due dates Effective January 1, 2016, ORC 718.03(B) established uniform due dates  Semi-monthly: o >$12,000 annually and/or >$1,000 in any month o payment & return due the 3 rd banking day after the 15 th & last day of the month o Must be received @ MUNI by due date 6

7. Withholding Uniformity: The Mostly Good News Effective January 1, 2016, ORC 718.03(B) allows municipalities the option to mandate: Effective January 1, 2016, ORC 718.03(B) allows municipalities the option to mandate:  Payment of WH by EFT if the employer must use EFT for remitting federal taxes withheld  The option to require EFT remittance is not linked to a specific level of withholding  Whether or not EFT is required, EFT is an excellent way to meet the remittance due dates, especially those “received by” due dates 7

8. Withholding Uniformity: The “At Least It’s Uniform” News Effective January 1, 2016, ORC 718.03(B) makes clear that the employer, agent of the employer, or other payer is on the hook for the greater of the tax withheld or the tax required to be withheld Effective January 1, 2016, ORC 718.03(B) makes clear that the employer, agent of the employer, or other payer is on the hook for the greater of the tax withheld or the tax required to be withheld  Liability follows the officers and other employees with check writing authority, and the liability is not discharged in bankruptcy 8

9. Withholding Uniformity: The “At Least It’s Uniform” News Effective January 1, 2016, ORC 718.03(J) makes clear withholding on tips is required if those tips come under the control of the employer during processing (i.e., credit and debit card tips that the employer converts into cash for the employee) Effective January 1, 2016, ORC 718.03(J) makes clear withholding on tips is required if those tips come under the control of the employer during processing (i.e., credit and debit card tips that the employer converts into cash for the employee) Effective January 1, 2016, ORC 718.03(K) makes it clear that courtesy withholding is subject to the same due dates as mandatory withholding Effective January 1, 2016, ORC 718.03(K) makes it clear that courtesy withholding is subject to the same due dates as mandatory withholding 9

10. Withholding Uniformity: The “At Least It’s Uniform” News The definition of “qualifying wages” has been tweaked (often for clarity): The definition of “qualifying wages” has been tweaked (often for clarity):  3rd party disability payments no longer included in qualifying wages (Exempt from WH & tax)  Supplemental unemployment compensation is now clearly part of qualifying wages  Clergy wages are now clearly part of qualifying wages (clergy housing is still exempt income)  Wages that qualify for the foreign income exclusion are taxable qualifying wages 10

11. Withholding Uniformity: Paved with Good Intentions The “small employer withholding exception”: The “small employer withholding exception”:  A small employer is an employer whose gross receipts the previous year < $500,000  Gross receipts are from ALL sources, including intangible income, grants, and expense reimbursements (so payments made to a common paymaster to cover the related party’s payroll are included in gross receipts) 11

12. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (continued): The small employer withholding rules (continued):  To qualify for the small employer withholding rules, a small employer must have a fixed location in Ohio  A small employer with a fixed location in Ohio withholds as if all of the wages of all employees were earned for work performed at the fix location 12

13. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (continued): The small employer withholding rules (continued):  If the employer qualifies to use the small employer withholding rules, the rules are not optional… unless the employer enters an agreement with the municipalities involved 13

14. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (continued): The small employer withholding rules (continued):  What happens if the taxpayer has 3 locations: Cleveland, Brecksville, and Olmsted Township?  Employer must withhold either Cleveland or Brecksville tax on all employees Principal place of work (we will discuss later) Principal place of work (we will discuss later) Main reporting office if no prin. place of work Main reporting office if no prin. place of work 14

15. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (Example 1): The small employer withholding rules (Example 1):  Joe’s Plumbing’s has two locations in Ohio: One in Perry Township in Franklin County One in Perry Township in Franklin County One within the city limits of Delaware One within the city limits of Delaware  Joe’s Plumbing’s gross revenue from all sources last year was $325,000 15

16. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (Example 1): The small employer withholding rules (Example 1):  Joe’s Plumbing employs six full-time that work in C-bus, Dela, Dublin, Grove City, and Hilliard 4 employees work out of the Perry Twp office 4 employees work out of the Perry Twp office 2 employees work out of the Dela City office 2 employees work out of the Dela City office  Each of the six employees worked 30 days in each of the above municipalities 16

17. Withholding Uniformity: Paved with Good Intentions The small employer withholding rules (Example 1): The small employer withholding rules (Example 1):  Joe’s Plumbing must withhold Delaware tax on all qualifying wages of all six employees, even those who work out of the Perry Township location  The 4 Perry Twp employees would be eligible for “days-worked-out” refund in Delaware, but then would be subject to tax in the non-withheld cities 17

18. Withholding Uniformity: Paved with Good Intentions The basic “Occasional Entrant Rule”: The basic “Occasional Entrant Rule”:  Extends from 12 to 20 the number of days an individual must perform services in a municipality before the employer is required to withhold tax  If the threshold is not exceeded, the employer withholds only for the employee’s “principal place of work” if that location is within a municipality  If the 20-day threshold is exceeded, the employer is not responsible for the withholding for the first 20 days (no retro like 12-day rule) 18

19. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule: The basic Occasional Entrant Rule:  If the employee is not a resident of a municipality for which the employer did not withhold because the employer correctly applied the Occasional Entrant Rule, that income is “Exempt Income” at the employee level as far as that nonresident municipality is concerned  The exemption goes away if the employee claims a refund from the municipality to which the tax withheld on those exempt wages was remitted 19

20. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule: The basic Occasional Entrant Rule:  Qualifying wages are never exempt from the tax imposed by an employee’s resident municipality 20

21. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule (Example 2): The basic Occasional Entrant Rule (Example 2):  So if John’s principal place of work is in Grove City, and he works 7 days in Columbus, and his employer correctly withholds Grove City tax on his wages earned in Columbus, and  John is a Bexley resident, then  John’s wages earned in Columbus are exempt income as far as Columbus is concerned unless John requests a refund of the Grove City tax withheld on those wages earned in Columbus 21

22. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule (Example 2): The basic Occasional Entrant Rule (Example 2):  Because John is a Bexley resident, John owes Bexley tax on all of his qualifying wages including those qualifying wages earned in Columbus that were exempt income as far as Columbus is concerned  Bexley’s normal rules for granting residents credit for taxes paid to another municipality would apply 22

23. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule (Example 3): The basic Occasional Entrant Rule (Example 3):  However, if Jane’s principal place of work is in Prairie Township, and she works 7 days in Columbus, and her employer correctly withholds no tax on her wages earned in Columbus, and  Jane is a Bexley resident, then  Jane’s wages earned in Columbus are exempt income as far as Columbus is concerned unless Jane requests a refund of the tax that wasn’t withheld on those wages earned in Columbus 23

24. Withholding Uniformity: Paved with Good Intentions The basic Occasional Entrant Rule (Example 3): The basic Occasional Entrant Rule (Example 3):  Because Jane is a Bexley resident, she owes Bexley tax on all of her qualifying wages, even those wages that were exempt from Columbus withholding under the Occasional Entrant Rule 24

25. Withholding Uniformity: Paved with Good Intentions The BIG exceptions to Occasional Entrant Rule: The BIG exceptions to Occasional Entrant Rule:  Small employers that have a fixed location in Ohio (as discussed earlier)  Professional Athletes have no protection under the Occasional Entrant Rule  Professional Entertainers paid on a per-event basis have no protection under the Occasional Entrant Rule 25

26. Withholding Uniformity: Paved with Good Intentions Other big exceptions to Occasional Entrant Rule: Other big exceptions to Occasional Entrant Rule:  Public Figures paid to give speeches or paid to make public appearances have no protection under the Occasional Entrant Rule  Promoters who had no protection under the old 12 day rule now have protection under the new 20 day rule provided they are themselves not public figures paid to give speeches or paid to make a public appearance 26

27. Withholding Uniformity: Paved with Good Intentions The new exceptions to Occasional Entrant Rule: The new exceptions to Occasional Entrant Rule:  Employees at a “Presumed Worksite Location” If the employer can reasonably expect to be providing services at a jobsite in a municipality for more than 20 days during the year, the employer must withhold on all qualifying wages earned by employees working at that jobsite, even on those wages earned by employees whom the employer knows will work less than 20 days in the municipality If the employer can reasonably expect to be providing services at a jobsite in a municipality for more than 20 days during the year, the employer must withhold on all qualifying wages earned by employees working at that jobsite, even on those wages earned by employees whom the employer knows will work less than 20 days in the municipality 27

28. Withholding Uniformity: Paved with Good Intentions The new exceptions to Occasional Entrant Rule: The new exceptions to Occasional Entrant Rule:  Employees working in their resident municipality if the employer has agreed as a courtesy to withhold resident withholding It can be argued that the code as written only requires the employee’s request to force the employer to withholding workplace tax to an employee’s resident municipality from day one It can be argued that the code as written only requires the employee’s request to force the employer to withholding workplace tax to an employee’s resident municipality from day one 28

29. Withholding Uniformity: Paved with Good Intentions The new exceptions to Occasional Entrant Rule: The new exceptions to Occasional Entrant Rule:  Employees working in the same municipality in which the employees’ “Principal Place of Work” is located 29

30. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  What is an employee’s “principal place of work”? The fixed location in Ohio to which the employee is required to report for duty on a regular and ordinary basis The fixed location in Ohio to which the employee is required to report for duty on a regular and ordinary basis If no fixed location applies, then its the Ohio “worksite location”, such as a construction site or temporary job site, to which the employee is required to report for duty on a regular and ordinary basis If no fixed location applies, then its the Ohio “worksite location”, such as a construction site or temporary job site, to which the employee is required to report for duty on a regular and ordinary basis 30

31. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  What is an employee’s “principal place of work”? If no fixed location applies and no worksite location applies, then the principal place of work is the location in Ohio at which the employee spends the greatest number of days in a calendar year performing services for the employer If no fixed location applies and no worksite location applies, then the principal place of work is the location in Ohio at which the employee spends the greatest number of days in a calendar year performing services for the employer 31

32. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  What is an employee’s “principal place of work”? All employees have a “principal place of work” All employees have a “principal place of work” If there is a tie, the employer must use allocate the employee’s qualifying wages between the tied principal places of work using a reasonable method If there is a tie, the employer must use allocate the employee’s qualifying wages between the tied principal places of work using a reasonable method 32

33. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule quiz: The Occasional Entrant Rule quiz:  ABC Company is not a small employer  ABC Company has no fixed location in Ohio  ABC Company had no presumed worksites in Ohio, and thus had no reason to believe that any employee would work in any Ohio municipality more than 20 days during the year  ABC Company has no employees that are Ohio residents 33

34. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule quiz (continued): The Occasional Entrant Rule quiz (continued):  One employee of ABC Company worked in Ohio as follows: 5 days in Brecksville during the first quarter 5 days in Brecksville during the first quarter 7 days in Dayton during the second quarter 7 days in Dayton during the second quarter 13 days in Toledo during the third quarter 13 days in Toledo during the third quarter 19 days in Lima during the fourth quarter 19 days in Lima during the fourth quarter  what muni must ABC Company withhold for the entire year? 34

35. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule quiz (continued): The Occasional Entrant Rule quiz (continued):  For what municipality must ABC Company withhold for the entire year? Lima Lima Under the code as written, the employer cannot claim protection for failing to withhold Brecksville, Dayton and Toledo tax under the Occasional Entrant Rule ORC 718.011(C) Under the code as written, the employer cannot claim protection for failing to withhold Brecksville, Dayton and Toledo tax under the Occasional Entrant Rule ORC 718.011(C) 35

36. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  For purposes of counting days for the Occasional Entrant Rule, an employee works in only one municipality each day The municipality in which the employee was deemed to have spent the most time working compared to other municipalities is the municipality in which the employee worked that day for purposes of counting up to 20 days The municipality in which the employee was deemed to have spent the most time working compared to other municipalities is the municipality in which the employee worked that day for purposes of counting up to 20 days 36

37. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  So, if Jane worked 40 minutes in Eastlake, 20 minutes in Willoughby, and 7 hours in Concord Township, for purposes of counting days for the Occasional Entrant Rule, Jane worked the entire day in Eastlake 37

38. Withholding Uniformity: Paved with Good Intentions The nuts and bolts of the Occasional Entrant Rule: The nuts and bolts of the Occasional Entrant Rule:  Time spent traveling to and from job sites and picking up goods or making deliveries is considered time spent working at the employee’s principal place of work  However, if the employee delivers and installs goods (i.e. “affixes to real property”), then the time spent installing the goods is time spent working in the municipality where delivery was made 38

39. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule caution: The Occasional Entrant Rule caution:  Employees covered by the Occasional Entrant Rule should only have one municipality’s tax withheld from their wages for any given day  The municipality (not jurisdiction) in which the employee was deemed to have spent the day under the rules for counting days is the municipality whose tax is withheld 39

40. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule caution example: The Occasional Entrant Rule caution example:  If on the employee’s 21st day working in Twinsburg as days are counted under the Occasional Entrant Rule, the employee worked 3 hours in Twinsburg and 5 hours in a township, the employer withholds Twinsburg tax on all 8 hours of the employee’s qualifying wages  The employer can elect not to withhold Twinsburg tax on the 5 hours worked in a township 40

41. Withholding Uniformity: Paved with Good Intentions The Occasional Entrant Rule caution example: The Occasional Entrant Rule caution example:  On the employee’s 21st day working in Twinsburg as days are counted under the Occasional Entrant Rule, the employee worked 2 hours in Eastlake where the employee has already worked 30 days under the Occasional Entrant Rule (6 hrs Twinsburg, 2 hrs Eastlake)  Since the employee was deemed to have worked in Twinsburg that day, the employer withholds Twinsburg tax on the wages earned in Twinsburg & Eastlake 41

42. Withholding Uniformity: Paved with Good Intentions Final words on the Occasional Entrant Rule: Final words on the Occasional Entrant Rule:  An employer’s use of the Occasional Entrant Rule for withholding is voluntary (unlike the small employer withholding rule)  Employers and municipalities now have statutory authority to enter into agreements allowing substitute methods of meeting an employer’s withholding requirements (even small employers’ withholding requirements) 42

43. Withholding Uniformity: Paved with Good Intentions Final words on the Occasional Entrant Rule: Final words on the Occasional Entrant Rule:  Without an agreement with the municipality that allows otherwise, the preponderance of a day withholding rules will apply even if the employer elects out of the Occasional Entrant Rule  The common situation of a small employer that leases its employees from a professional employer organization (ORC 4125) was not addressed in HB5. PEO’s are normally not small employers… err on the side of caution 43

44. Withholding Uniformity: Paved with Good Intentions Final words on the Occasional Entrant Rule: Final words on the Occasional Entrant Rule:  Uniform penalties and interest: Interest at federal short-term rate (rounded to nearest whole number percent) + 5% Interest at federal short-term rate (rounded to nearest whole number percent) + 5% Penalty for unpaid or late withholding is 50% Penalty for unpaid or late withholding is 50% Failure to timely file penalty of $25 per month up to $150 Failure to timely file penalty of $25 per month up to $150 Post judgment collection costs and fees, including attorney’s fees Post judgment collection costs and fees, including attorney’s fees 44

45. Withholding Under House Bill 5 Questions??? 45