When you start a new job or experience changes in your financial life, understanding tax forms and withholding is crucial. While the federal government uses the W-4 form to determine income tax withholding, state income taxes, like those in Iowa, operate in conjunction with these federal guidelines. This article will explain Iowa income tax withholding, how it relates to the concept of a W-4, and what you need to know to ensure you’re properly taxed in Iowa.
Iowa income tax withholding generally mirrors federal income tax withholding practices. This means that the wages and compensation subject to federal withholding are typically also subject to Iowa withholding. It’s important to note that certain employer contributions, such as those for employee retirement plans or health insurance, are often excluded from taxable wages and therefore not subject to withholding. For detailed specifics on what constitutes wages for federal purposes, you can refer to IRS Publication 15, Circular E.
Wages and Compensation Subject to Iowa Withholding
Iowa income tax is applied to various forms of employee compensation. Let’s break down some key categories:
Regular Wages and Salaries
Just like federal income tax, Iowa income tax is withheld from your regular wages and salaries. Employers are responsible for withholding the correct amount based on your income and the applicable tax rates.
Supplemental Wages: Bonuses, Overtime, and Commissions
In addition to your regular pay, you might receive supplemental wages such as bonuses, overtime pay, or commissions. Iowa law addresses these payments specifically.
Generally, if federal income tax is withheld at a flat rate on supplemental wages, Iowa income tax is also required to be withheld at the highest individual income tax rate. However, if supplemental wages are paid together with your regular wages, they are combined, and the standard withholding tables or formulas are used to calculate the Iowa income tax. This approach is detailed in Iowa Administrative Code rule 701—307.2(1)“c”.
Winnings from Gambling
Iowa also requires withholding on certain gambling winnings. Specifically, a 5% withholding rate applies to:
- Lottery winnings
- Winnings from games of skill, games of chance, and raffles exceeding $600
- Pari-mutuel winnings over $1,000
- Winnings exceeding $1,200 from slot machines at riverboats or racetracks
These rules are outlined in Iowa Administrative Code rule 701—307.1(1)“d”-“g”. It’s worth noting that for calendar year 2025, this withholding rate is scheduled to decrease to 3.8%.
Agricultural Wages
If you’re involved in agricultural labor, your wages are also subject to Iowa state income tax withholding, mirroring federal regulations. If agricultural wages are subject to federal income tax withholding, they are generally subject to Iowa withholding as well.
Nonwage Income Withholding in Iowa
Withholding isn’t limited to just wages. Iowa also requires or allows withholding on “nonwage income,” which includes:
- Pensions
- Annuities
- Supplemental unemployment benefits
- Sick pay benefits
- Other nonwage income payments to Iowa residents
Generally, if federal income tax is withheld from these types of income, Iowa income tax withholding is also required. Even if federal withholding isn’t applied, recipients can choose to have Iowa income tax withheld.
The standard withholding rate for nonwage income in Iowa is 5%. However, it’s important to be aware that in some situations, this 5% rate might be higher than necessary. Payers of nonwage income have the option to use withholding tables and formulas instead of the flat 5% rate. Similar to 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 if payment amounts or taxable amounts are below certain thresholds, if the payments are not subject to Iowa income tax, or if federal income tax withholding is not required.
Pension and Retirement Income Exclusion (and IA W-4P)
Iowa offers a significant tax benefit for retirees: the Pension and Retirement Income Exclusion. This exclusion applies to pensions, annuities, self-employed retirement plans, deferred compensation, IRA distributions, and other retirement benefits for individuals who qualify.
To be eligible for this exclusion, you must be:
- 55 years of age or older,
- Disabled, or
- A surviving spouse of someone who would have qualified.
Understanding the IA W-4P form for pension and annuity withholding in Iowa.
For those who qualify for this exclusion, administrators of pension and retirement plans are generally not required to withhold Iowa income tax from qualifying retirement income distributions. However, if a payee does not qualify for the retirement income exclusion but still wants 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. This form is specific to Iowa and allows retirees to manage their state income tax withholding on pension and annuity income, similar in concept to how the federal W-4 works for wages.
Military retirement benefits and military survivor benefits received under 10 U.S.C. §1447 are also eligible for exclusion from Iowa individual income tax and withholding.
Special Considerations for Nonresidents and Interstate Workers
Iowa has specific rules for nonresident employees and those working in interstate commerce.
Nonresident Wage and Salaries
If you are an employer doing business in Iowa, you are required to withhold Iowa individual income tax from the wages and salaries of nonresident employees who work in Iowa. This withholding is at the same rate as for resident employees.
Composite Return Requirement
For tax years starting on or after January 1, 2022, pass-through entities with nonresident members must file composite returns and pay composite return tax on behalf of those members. More information can be found on the Iowa Composite Returns for Tax Year 2022 and Later guidance page.
Other Nonresident Income Subject to Withholding
In addition to wages, certain other types of income paid to nonresidents are subject to Iowa withholding, including:
- Compensation paid to entertainers performing in Iowa (excluding payments to entertainment corporations).
- Rental payments from Iowa property.
- Income from temporary businesses in Iowa, such as construction contracts or fees for services.
- For tax years before January 1, 2022, taxable Iowa-source income paid to beneficiaries of Iowa estates or trusts.
- For tax years before January 1, 2022, Iowa-source income received by nonresident partners or shareholders of partnerships or S corporations doing business in Iowa.
Nonresidents in Interstate Commerce: Railroads, Airlines, and Trucking
Federal law provides exemptions for certain nonresidents working in interstate commerce. Iowa income tax should not be withheld from nonresidents employed by railroads, airlines, and trucking firms in interstate commerce if they work in at least one other state besides Iowa. In these cases, withholding might 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 agreement concerning individual income tax. This agreement simplifies tax obligations for residents who work across state lines.
Under the Iowa-Illinois Reciprocal Agreement:
- Iowa residents working in Illinois only pay Iowa income tax, not Illinois income tax, on wages and salaries.
- Illinois residents working in Iowa only pay Illinois income tax, not Iowa income tax, on wages and salaries.
The Employee’s Statement of Nonresidence in Iowa form is crucial for Illinois residents working in Iowa.
To ensure correct withholding under this agreement:
- Iowa residents working in Illinois should file Illinois form IL-W-5-NR “Employee’s Statement of Nonresidence in Illinois” with their Illinois employer and complete an Iowa W-4 form. (Note: while it mentions “Iowa W-4”, it’s likely referring to providing information equivalent to a federal W-4, as Iowa doesn’t have a direct “Iowa W-4” for general wage withholding).
- Illinois residents working in Iowa should file the Employee’s Statement of Nonresidence in Iowa (44-016) with 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 (that are not wages or salaries), are still taxed by the respective state where the income is sourced. Examples include Iowa gambling winnings and Iowa unemployment compensation for employment in Iowa, which are taxable by Iowa for Illinois residents, despite the reciprocal agreement covering wages.
Unemployment Benefit Payments
Recipients of unemployment benefits in Iowa can choose to have state income tax withheld from their payments at a rate of 5%. For questions about state unemployment benefits, contact Iowa Workforce Development at 866-239-0843.
Understanding Your Iowa Withholding Responsibilities
While Iowa doesn’t have a form explicitly called “Iowa W-4” for general wage withholding, the principles behind the federal W-4 – providing your employer with the information needed to withhold the correct amount of income tax – are still relevant in Iowa. Understanding the rules outlined above will help both employers and employees in Iowa ensure accurate income tax withholding and compliance with state law. For specific situations, especially concerning pension income or nonresident status, utilizing forms like the IA W-4P and the Employee’s Statement of Nonresidence in Iowa is essential.
