By John Burgett 

The Ohio House Bill 5 was signed into law in 2014 and became effective in 2016. This bill is designed to provide uniformity of the municipal tax code and simplify city compliance. Ohio’s municipal tax code has been an area of confusion and frustration for the construction industry for years.

Our construction clients conduct business in many cities throughout Ohio, which causes the headache of payroll withholding and calculating net operating losses, income tax reporting for pass-through entities, and other administrative procedures.

Rule 12 vs. the New House Bill 5
Construction companies are familiar with rule of 12 when it comes to payroll withholding for your employees. If a project lasts longer than twelve days in a city, then on the thirteenth day, the company starts withholding payroll retroactively back to day one.

The key provisions of the House Bill 5 are listed below:

  • The new rule adopts a twenty-day cutoff and removes the retroactive requirement. On the 21st day, the employer starts withholding payroll and is no longer required to withhold back to day one retroactively.
  • The occasional entrant rule applies to all compensation and creates a separate exemption to prohibiting the taxation of income for a business with less than $500,000 in annual revenue by any municipality other than the business’s fixed location or home base.
  • Withholding is still required even when a project does not last more than twenty days in a city. Withholding is sourced to the Principal Place of Work (PPW) until the twentieth day and then withheld in the city where the project is located starting on the 21st day.
  • PPW is defined as the business’s fixed business location or home base.
  • If the construction company is operating a construction site or temporary work location, the business must withhold payroll tax on day one if they reasonably expect the project to last longer than twenty days.
  • Changes to the definition of a principal place of work and guidance to employers on how to allocate qualifying wages for employees who work the same number of days in two or more cities.
  • The twenty-day rule does not apply to professional athletes, professional entertainers or public figures.

The Preponderance Test
An employee is considered to have a spent a day in a city by using the preponderance test. For example, imagine an employee spends a day in Cleveland. If he or she spends more time there than compared to Euclid and Bedford in one given day, the work is considered to be performed at the PPW because he or she is traveling to the first location of the day and traveling from one location to another.

If a company’s PPW is in Cleveland and has an employee performing construction activity in Euclid and Bedford for the day, the travel time to Euclid and the travel time from Euclid to Bedford is considered to be performed in Cleveland.  Assume travel to each city takes .5 hours. If the employee works in Euclid for three hours and Bedford for four hours, the time worked in Cleveland amounts to one hour. The employee is deemed to have worked in Bedford all day because most of their day is there.

If an employee works in Euclid for 18 days and the PPW is in Cleveland then for 18 days payroll tax is withheld in Cleveland. In the same example, if the PPW is a township then the employer does not need to withhold because townships do not have an income tax. If the project is reasonably expected to last more than twenty days or the contract between client and business states more than twenty days, then the employer should withhold in Euclid starting on day one. This adjustment will remove Cleveland from the withholding requirement. If the PPW is in Cleveland and the project is in Cleveland, then payroll tax withholding starts on day one.

If no fixed location for the business exists, then the PPW is the worksite location where the employee is required to report on a regular daily basis. A worksite location is a construction site in Ohio where the employer performs work on more than twenty days in a colander year. The worksite location cannot include the employee’s residence or a location outside the Ohio.


The Ohio House Bill 5 provides construction businesses with more flexibility when they need to begin paying municipal income taxes. With each construction company comes its unique factors and tax changes that can affect business. To find out how this bill affects you directly, contact your advisor for more information.