Indiana, Ohio Present Complex Local Tax Landscapes

Indiana’s county income taxes are relatively simpler than Ohio’s municipal income taxes, but the states present two of the more challenging local tax regimes, a payroll trainer said May 17.

Indiana’s county income taxes are administered by the state and are based on where the employee lives, said Steve Hodgson, CPP, director of payroll training for the American Payroll Association. In Ohio, municipal income taxes must be withheld where the employee works, though employees may also be liable for tax where they live, while school-district income taxes are withheld where the employee lives, he said at the association’s annual conference in Long Beach, Calif.

Indiana

All 92 of Indiana’s counties assess an income tax on residents of the county and Indiana nonresidents who work in the county, Hodgson said. County income taxes are administered by the state, which publishes county tax rates together with state withholding information in Departmental Notice No. 1. The notice is generally updated with tax rate changes twice a year, effective Jan. 1 and Oct. 1, he said.

The state withholding certificate, Form WH-4, Employee’s Withholding Exemption and County Exemption Certificate, also is used for county taxes because employees must indicate their counties of residence and work as of each Jan. 1, Hodgson said. If an employee moves to another county or Indiana nonresidents start working in a different county, the corresponding tax change does not take effect until Jan. 1 of the next year, he said.

Indiana also allows a credit for local taxes paid in another state, Hodgson said. The amount of the credit is either the amount of the other local tax paid, the taxable wages for the other locality multiplied by the Indiana county’s tax rate, or the amount of county tax paid, whichever is least, he said. Indiana’s reciprocity agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin do not affect county tax, he said.

Ohio

More than 600 Ohio localities assess income tax, according to the latest state data, which is from 2017, Hodgson said. The state taxation department does not administer local income tax, but about 70% of local taxes are administered by three collection agencies: the Regional Income Tax Agency; Cleveland’s Central Collection Agency; and Columbus’s Income Tax Division, which effective for 2019 only administers Columbus’s income tax and two others, he said.

Ohio began an effort to standardize local taxes with a law (H.B. 5), effective Jan. 1, 2016, that primarily required municipalities to rewrite their income tax ordinances to follow state law, rather than representing a real standardization effort, Hodgson said. Not all Ohio localities assess income tax, as state law only allows cities and villages, and not townships, to do so, he said. However, townships may form joint economic-development districts or zones, which may levy income tax, in cooperation with cities or villages to share in the receipts of the district’s income tax, Hodgson said.

Employees are primarily liable for local income tax based on where they work, Hodgson said. Employees who live and work in different localities may also be liable for tax where they live, but employers are not required to withhold for such employees’ residences, he said. Localities may have a credit for some or all of taxes paid to other localities, but not all do so, he said.

If employees work in more than one locality, taxes are prorated according to the time spent in both localities, Hodgson said.

The taxable wages for local income tax are generally Medicare wages, but employers should check tax ordinances to confirm whether municipalities have been allowed to continue enforcing pre-2016 provisions that do not conform to H.B. 5, Hodgson said.

The state taxation department provides tools allowing users to find local tax rates, as well as the taxes in effect for a given address or location, but the data may not always be completely accurate and employers may also want to use U.S. Census Bureau data to help determine which municipality an employee lives in, Hodgson said.

Ohio School Districts

Ohio school districts may also impose income taxes, but such taxes are based on place of residence, not work, Hodgson said. School district taxes are administered by the state taxation department, he said. Employees must include their school district’s name and code on the state withholding certificate, Form IT 4, Employee’s Withholding Exemption Certificate, Hodgson said.

School districts may choose for their taxes to have either traditional or earned-income tax bases, Hodgson said. The traditional tax base uses the same definition of wages for state income tax and allowances worth $650, using the same number of allowances claimed on Form IT 4, he said. The earned-income tax base, which represents about 25% of school districts, does not use allowances and only taxes earned income and self-employment income, Hodgson said.

Tax rates must be a multiple of 0.25%, and rates currently range from 0.25% to 2%, Hodgson said. A list of school district tax rates and changes, which are effective Jan. 1 of each year, is published by the state taxation department at the end of the year.

Employers in Ohio’s reciprocity states of Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia who have employees in Ohio do not have to withhold school district income tax, Hodgson said.