Iowa, like many other states, requires employers to withhold state income tax from their employees’ wages. This system ensures that residents pay their state income taxes gradually throughout the year, similar to federal income tax withholding managed by the Internal Revenue Service (IRS) using Form W-4. While Iowa’s withholding system often mirrors federal guidelines, there are specific state rules and forms that both employers and employees in Iowa need to understand.
Iowa income tax withholding generally applies to the same wages and compensation as federal withholding. This includes salaries, hourly wages, bonuses, commissions, and overtime pay. However, certain employer contributions to employee retirement plans or health insurance are exempt from withholding, aligning with federal regulations detailed in IRS Publication 15, Circular E.
Supplemental Wages in Iowa
Supplemental wages, which are payments made in addition to an employee’s regular wages, such as bonuses, overtime pay, and commissions, are also subject to Iowa income tax withholding. If federal income tax is withheld at a flat rate on these supplemental wages, Iowa law mandates withholding at the highest individual income tax rate. However, if supplemental wages are combined with regular wage payments, the standard withholding tables or formulas are used for calculation, as outlined in Iowa Administrative Code rule 701—307.2(1)“c”.
Withholding on Gambling Winnings
Iowa imposes a withholding tax on certain gambling winnings. Currently, a 5 percent withholding rate applies to lottery winnings and winnings from games of skill, chance, and raffles exceeding $600. This also includes pari-mutuel winnings over $1,000 and slot machine winnings exceeding $1,200 from riverboats or racetracks. It’s important to note that this withholding rate is scheduled to decrease to 3.8% in calendar year 2025. These regulations are detailed in Iowa Administrative Code rule 701—307.1(1)“d”-“g”.
Agricultural Wage Withholding
Wages paid for agricultural labor in Iowa are subject to state income tax withholding to the same extent that they are subject to federal income tax withholding. This means if agricultural wages are subject to federal withholding, they are generally also subject to Iowa withholding.
Nonwage Income Withholding
Nonwage income, which includes payments like pensions, annuities, supplemental unemployment benefits, and sick pay for Iowa residents, generally requires Iowa income tax withholding when federal income tax is also withheld. Even if federal withholding is not required, recipients can choose to have Iowa income tax withheld.
The standard withholding rate for nonwage income in Iowa is 5 percent. However, payers should be aware that this rate might be excessive in some cases. Alternatively, payers can use withholding tables and formulas for these payments. Like gambling winnings, the withholding rate for nonwage income is also set to change to 3.8% in calendar year 2025. Iowa withholding is not required for nonwage income payments below certain taxable levels, payments not subject to Iowa income tax, or payments exempt from federal income tax withholding.
Pension and Retirement Income Exclusion (IA W-4P)
Iowa offers a pension and retirement income exclusion for qualified individuals. This exclusion applies to pensions, annuities, self-employed retirement plans, deferred compensation, IRA distributions, and other retirement benefits. To qualify, individuals must be 55 years of age or older, disabled, or a surviving spouse of someone who would have qualified.
Plan administrators are generally not required to withhold Iowa income tax from qualifying retirement income distributions to eligible recipients. However, if a recipient does not qualify for this exclusion, the administrator must withhold Iowa income tax at the same rate as other nonwage income. For those who qualify for the exclusion but still wish to have tax withheld from their pension or retirement income, they can submit Form IA W-4P – Withholding Certificate for Pension or Annuity (44-020) to their plan administrator.
Military retirement benefits and survivor benefits received under 10 U.S.C. §1447 are also excludable from Iowa individual income tax and withholding.
Withholding for Nonresident Employees
Employers operating in Iowa must withhold Iowa individual income tax from the wages and salaries of nonresident employees working within the state, using the same rates as for resident employees. An exception to this rule exists under the Iowa-Illinois Reciprocal Agreement, discussed below.
Composite Returns for Pass-Through Entities
For tax years starting on or after January 1, 2022, pass-through entities with nonresident members are required to file composite returns and pay composite return tax on behalf of these members. Further details are available on the Iowa Department of Revenue’s guidance page regarding Iowa Composite Returns for Tax Year 2022 and Later.
Other Nonresident Income Subject to Withholding
In addition to wages, certain other types of income paid to nonresidents are subject to Iowa withholding. These include:
- Compensation for entertainers performing in Iowa (excluding payments to entertainment corporations).
- Rental payments from Iowa property.
- Income from temporary businesses, such as construction contracts or fees for services performed in Iowa.
- For tax years before January 1, 2022, taxable Iowa-source income paid to beneficiaries of Iowa estates or trusts, or to nonresident partners or shareholders of partnerships or S corporations doing business in Iowa.
Interstate Commerce Workers (Railroads, Airlines, Trucking)
Federal law dictates that Iowa income tax should not be withheld from nonresidents working in Iowa for railroads, airlines, and trucking firms engaged in interstate commerce, provided they also work in at least one other state. In these cases, withholding may be required by the employee’s state of residence, or the nonresident employee may need to make estimated tax payments to their state of residence.
Iowa-Illinois Reciprocal Agreement
Iowa and Illinois have a reciprocal income tax agreement. This agreement means that wages or salaries earned by an Iowa resident working in Illinois are only taxable in Iowa, not Illinois, and vice versa for Illinois residents working in Iowa.
Iowa residents working in Illinois should complete Illinois form IL-W-5-NR “Employee’s Statement of Nonresidence in Illinois” and submit it to their employer. They should also complete an Iowa W-4 form for Iowa income tax purposes. Illinois residents working in Iowa should complete the Employee’s Statement of Nonresidence in Iowa (44-016) and provide it to their Iowa employer.
It’s important to note that this reciprocal agreement only applies to wages and salaries. Other types of Iowa-source income received by Illinois residents, and Illinois-source income received by Iowa residents, such as gambling winnings or unemployment compensation, are not covered and are taxable by the respective state where the income is sourced.
Unemployment Benefit Withholding
Recipients of unemployment benefits in Iowa can elect to have state income tax withheld from their payments at a rate of 5 percent. For questions about state unemployment benefits, individuals can contact Iowa Workforce Development at 866-239-0843.
Understanding Iowa income tax withholding is crucial for both employers and employees to ensure compliance with state tax laws. By adhering to these guidelines, both parties can avoid potential tax issues and maintain accurate financial records.
