Wages and Other Employee Compensation
Iowa income tax withholding is generally applied to the same wages and compensation to which federal withholding applies. Certain payments made by the employer into employee retirement plans or for employee health insurance are not considered wages and are not included in the calculations of withholding tax. See IRS Publication 15, Circular E, for details.
Supplemental Wages
"Supplemental wages" includes a bonus, overtime pay, commission or other special payment that is made in addition to the regular wage payment. If federal income tax is withheld on a flat rate basis, Iowa income tax is required to be withheld at the highest rate applicable to individuals. However, if the supplemental wage payment is included with the regular wage payment, the two are combined and the withholding tables or formulas are used. Iowa Administrative Code rule 701—307.2(3).
Winnings from Gambling
Iowa tax is required to be withheld at the rate of 5 percent from lottery winnings and winnings from games of skill, games of chance and raffles in excess of $600, pari-mutuel winnings of more than $1,000, and winnings in excess of $1,200 from slot machines on riverboats or at racetracks. Iowa Administrative Code rule 701—307.1(1)"d".
Agricultural Wages
Wages paid for agricultural labor are subject to withholding for state income tax purposes to the same extent that the wages are subject to withholding for federal income tax purposes.
Nonwage Withholding Requirements
"Nonwage income" includes pensions, annuities, supplemental unemployment benefits, sick pay benefits, and other nonwage income payments to Iowa residents. Iowa income tax is generally required to be withheld in cases where federal income tax is withheld. In situations where no federal income tax is withheld, the receiver of the payment may choose to have Iowa withholding taken out.
Withholding on nonwage income may be made at a rate of 5 percent. Withholding agents should be aware that in certain cases the 5 percent rate may be excessive. Payers of nonwage income also have the option of withholding Iowa income tax from these payments on the basis of tables and formulas.
Iowa withholding is not required when payment amounts or taxable amounts of nonwage incomes fall below certain levels, when payments are not subject to Iowa income tax, or when no federal income tax withholding is required on those payments.
Pension and Retirement Income Exclusion (IA W-4P)
An exemption is provided for pensions, annuities, self-employed retirement plans, deferred compensation, IRA distributions, and other retirement benefits to qualified individuals.
To qualify you must be 55 years of age or older, disabled, or a surviving spouse of an individual who would have qualified.
Pension and retirement plan administrators are generally not required to withhold Iowa income tax on distributions of qualifying retirement income made to eligible payees. If a payee does not qualify for the retirement income exclusion, the plan administrator is required to withhold Iowa income tax from these payments at the same rate as other nonwage income payments. Iowa Administrative Code rule 701 — 307.1(2). If you qualify for the pension and retirement income exclusion, but would like tax withheld from your pension or retirement income distributions, submit a W-4P (pdf) to your plan administrator.
Military retirement benefits can also be excluded from Iowa individual income tax and withholding. The exclusion also applies to military survivor benefits received under 10 U.S.C. 1447.
Nonresident Wage and Salaries
Employers doing business in Iowa are required to withhold Iowa individual income tax from the wages and salaries of nonresident employees working in Iowa at the same rate as for residents.
Exception: See Iowa-Illinois reciprocal agreement later in this publication.
Composite Return Requirement
For tax years beginning 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 its nonresident members. Visit the Iowa Composite Returns for Tax Year 2022 and Later guidance page for more information about the requirement.
Other Nonresident Income
The payer or withholding agent may withhold on a one-time basis. The following additional types of income to nonresidents are subject to Iowa withholding:
- Compensation paid to entertainers performing in Iowa, but not payments to entertainment corporations.
- Rental payments received from Iowa property.
- Income derived from any business of a temporary nature such as contracts for construction or fees paid for services in Iowa.
- For tax years beginning prior to January 1, 2022, taxable Iowa-source income paid to a beneficiary of an Iowa estate or trust.
- For tax years beginning prior to January 1, 2022, Iowa-source income received by a nonresident partner or shareholder of a partnership or S corporation doing business in Iowa.
Nonresidents Working in Interstate Commerce – Railroads / Airlines / Trucking
Under provisions of federal law, Iowa tax should not be withheld from nonresidents working in Iowa as employees of railroads, airlines, and trucking firms in interstate commerce if they are working in at least one other state. Withholding may be required for the employee’s state of residence or the nonresident employee may be required to make estimated payments to their state of residence.
Iowa-Illinois Reciprocal Agreement
Iowa and Illinois have a reciprocal agreement for individual income tax purposes.
Any wages or salary made by an Iowa resident working in Illinois is taxable only to Iowa and not to Illinois. Any wages or salary made by an Illinois resident working in Iowa is taxable only to Illinois and not to Iowa.
An Iowa resident working for wages or salary in Illinois should complete and file Illinois form IL-W-5-NR “Employee's Statement of Nonresidence in Illinois” with the employer so that the employer will be aware it is appropriate to withhold Iowa income tax. The Iowa resident should also complete an Iowa W-4.
An Illinois resident working for wages or salary in Iowa should complete and file the IA 44-016 “Employee's Statement of Nonresidence in Iowa” with the employer so that the employer will be aware it is appropriate to withhold Illinois income tax.
Iowa will tax any Iowa-source income received by an Illinois resident that is not from wages or salaries. Illinois will tax any Illinois-source income received by an Iowa resident that is not from wages or salaries. Examples of income that are not wages and salaries and, therefore, not covered under the Iowa-Illinois Reciprocal Agreement are Iowa gambling winnings and unemployment compensation for employment in Iowa.
Unemployment Benefit Payments
Recipients of benefits may choose to have state income tax withheld from the benefit payments at a rate of 5 percent. Questions concerning state unemployment are answered by Iowa Workforce Development at 866-239-0843.