Estimated Income Tax Payments
This publication is intended as a general guide. For additional details reference Iowa Administrative Rules Chapter 701-49.
Income Subject to Estimated Tax
Taxpayers who receive income other than those subject to Iowa income tax withholding may be required to pay estimated income tax.
Income Subject to Withholding
Income subject to Iowa income tax withholding includes all types of employee compensation, such as:
- Taxable fringe benefits
It does not matter if the income is based on the hour, day, week, month, year, or on a piecework or percentage plan. It also doesn’t matter if the employee is paid in cash or in some other form.
Estimated Tax Defined
Estimated income tax is just that – estimated. The taxpayer approximates what his or her yearly income will be, subtracts estimated allowable deductions, computes the tax, and pays it before filing an income tax return.
The following information will assist you in determining whether or not you should be paying estimated income tax.
Who Must Pay Estimated Tax?
Taxpayers who estimate they will owe $200 or more in tax on income not subject to withholding must pay estimated tax . When the annual income tax return is filed, the prepaid estimated tax is credited against the actual tax liability.
The following typically make estimated tax payments:
- Self-employed taxpayers
- Retired persons receiving benefits, certain pensions, and income not subject to withholding
- Taxpayers who earn at least two-thirds of their income from farming or fishing
- Nonresidents who earn or receive income from an Iowa source that is not subject to Iowa income tax withholding
- Beneficiaries of estates or trusts – residents and nonresidents
- Taxpayers with income in addition to wages, such as interest, dividends, capital gains, rents, royalties, business income, farm income, or certain pensions
Spouses must make separate estimated payments if they file separate Iowa returns (status 4) or separately on a combined Iowa return (status 3). Each spouse then claims the estimated payments he or she made on the income tax return.
Nonresidents and Estimated Tax
Nonresidents who earn wages from services performed in Iowa do not make estimated payments to Iowa. Employers must withhold Iowa income tax from their wages.
Estimated Tax Instead of Withholding
Nonresidents whose Iowa income is other than wages can choose to have Iowa income tax withheld or to pay estimated income tax.
Release from withholding
To make estimated payments on income subject to withholding, nonresidents must complete the Nonresident Request For Release From Withholding (pdf) and submit it with a tax payment and installment coupon to the Department at the address on the coupon. The Department will then send a release to the payer. The release must be obtained before the nonresident receives the income.
Example of release from withholding
A nonresident owns an apartment complex in Iowa operated by a manager. Before the rental income is sent to the owner, the manager withholds Iowa income tax. The manager must be registered with the Department as an Iowa withholding agent. If the owner wants to pay estimated taxes instead, the owner must complete the nonresident estimated income tax form and pay in full any tax due. After receiving the form and payment, the Department sends a release from withholding certificate to the manager.
Withholding Agents and Estimated Tax
Certain withholding agents, such as farm management companies, can choose to make estimated tax payments on behalf of nonresident taxpayers from sales of agricultural commodities or products. The payments should be made by the last day of the month following the nonresident’s tax year.
Paying Estimated Tax
Iowa estimated payments may be made online through eFile & Pay.
How Often are Estimated Tax Payments Made?
Farmers and Fishers
Taxpayers who derive at least two-thirds of their annual income from farming or fishing may pay their estimated taxes as described above, but they also have two other options:
1) They may pay the entire estimated tax by January 15 following the tax year and file the tax return by April 30
2) They may file the income tax return and pay the tax in full on or before March 1 of the year following the tax year.
Amending Estimated Payments
If income will be greater or less than initially estimated, the estimated tax payment should be adjusted.
An individual is making joint estimated tax payments on a calendar-year basis. The estimated taxable income is $8,500 and the estimated income tax liability is $300. The taxpayer pays the first quarterly installment of $75 by April 30 of the current year and the second installment of $75 by June 30.
On July 15 the same individual sells real estate, which results in additional taxable income of $7,500. The total taxable income for the year is now $16,000, with a total tax liability of $900. Since $150 has already been paid in two payments, the remaining tax liability of $750 must be divided into two payments of $375 each. The first of the last two payments will be due on September 30 of the current year, and the second and last payment will be due January 31 of the following year.
Penalty for Underpayment of Estimated Tax
If a taxpayer has a tax liability of $200 or more from income that is not subject to withholding, a penalty for underpayment of estimated tax may apply. The penalty is computed on form IA 2210 (find forms online here).
Farmers and Fishers
Taxpayers who earn at least two-thirds of their annual gross income from farming or fishing compute the penalty on form IA 2210F (find forms online here).
Taxpayers may avoid the penalty for underpayment of estimated tax if either of the following requirements is met:
1) The current tax year payments, made on or before the due dates, are equal to or exceed the prior year’s tax liability. The prior year must cover a 12-month period.
2) The current tax year payments, made on or before the due dates, are at least 90% of the tax on the current year's annualized taxable income as determined on form IA 2210.
High income taxpayers
High income taxpayers may be required to pay more than 100% of the prior year's tax liability to avoid penalty. An individual is a high income taxpayer if the federal AGI for the prior year exceeded $150,000 ($75,000 for married taxpayers filing separate federal returns). Please see IA 1040ES Instructions for the correct percentage for a specific tax year.
Can Penalty Be Waived?
The penalty for underpayment of estimated taxes may be waived in the following situations:
1) The underpayment was due to casualty, disaster, or other unusual circumstances
2) The underpayment was made by an individual who retired after having attained age 62, or who became disabled in the tax year of which the estimated tax was due or in the preceding tax year, and the underpayment was due to reasonable cause and not to willful neglect.