If your small business has employees working in Iowa, you’ll need to withhold and pay Iowa income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Iowa state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Iowa) issue separate state tax ID numbers Iowa’s tax ID number is based on the EIN but adds three digits. You should have an EIN before registering with the state (see below). You can apply for an EIN at irs.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish an Iowa withholding tax account with the Iowa Department of Revenue (DOR). You set up your account by registering your business with the DOR either online or on paper. To register online, go to the Business Tax Registration page on the DOR website. To register on paper, use Form 78-005, Iowa Business Tax Permit Registration. You can submit Form 78-005 by regular mail or by fax. Within 4-6 weeks after the DOR processes your Business Tax Registration form, you will receive a tax permit number and Business eFile Number (BEN) letter in the mail. There is no fee to register your business with the DOR for withholding tax purposes (registrations for some other purposes do incur a fee).
All new employees for your business must complete a federal Form W-4 and the related Iowa Form IA W-4,Employee Withholding Allowance Certificate. If an employee does not provide a Form IA W-4, you must withhold at zero allowances. You can download blank Form IA W-4s from the withholding tax forms section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
In Iowa, there are three possible payment schedules for withholding taxes: semi-monthly, monthly, or quarterly. Your payment schedule ultimately will depend on the average amount you withhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
Here are the due dates for payments:
If the due date falls on a weekend, federal holiday, or legal holiday, the due date is moved to the next bank working day following the weekend or legal holiday.
Semi-weekly payers must pay using electronic funds transfer (EFT). Other employers may pay electronically or on paper (by check or money order). Electronic payment options include:
For more information on these options, check the Electronic Payment Options page on the DOR website. If you ePay and eFile (see below), mail nothing to the DOR.
If you qualify and prefer to pay with check or money order, please use the payment vouchers you receive in the mail from the DOR. The payment vouchers, along with the confirmation number received when you registered your business as an employer, are important to match your payment to your electronically filed return. You will receive a year’s supply of payment vouchers in each mailing. A payment voucher is not a return (see below) and you must file a return even if you make a payment with the voucher. Do not mail the payment voucher if a zero balance is due or if your payment was made electronically.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check the DOR’s Withholding Tax Information webpage. On the page you can find links to downloadable withholding tax tables and other useful information.
Apart from making scheduled tax payments, businesses also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. The returns must be filed electronically through the Internet or by touch-tone telephone through the DOR’s eFile & Pay (eFP) system. The DOR does not mail paper returns. As a registered business, you will receive a letter from the DOR with an access code to eFP called the Business eFile Number.
Quarterly returns for employers on all payment schedules are due on or before the last day of the month following the close of the quarter:
As mentioned above:
Payments on paper (by check of money order) are submitted with a payment voucher, which is not the same as a quarterly return.
As with tax payments, if a quarterly return due date falls on a weekend, federal holiday, or legal holiday, the due date is moved to the next bank working day following the weekend or legal holiday.
After the end of the year, you must file a Verified Summary of Payments Report (VSP; also known as an annual reconciliation) with the DOR. The VSP summarizes the employee taxes you’ve withheld during the year. Filing the VSP is in addition to providing each of your employees with a federal Form W-2 summarizing the employee’s withholding for the year. The VSP is submitted online through eFile & Pay or by touch-tone telephone. The DOR does not provide paper VSPs. Unlike annual reconciliations in most other states, Iowa employers are not required to include copies of the W-2s sent to their Iowa employees with their VSPs. However, employers are required to keep copies of the W-2s for at least four years from the end of the year for which the forms apply. The annual reconciliation is due on or before the last day of February.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Iowa employee withholding taxes. Under Iowa law, officers, members, or employees of a business who are responsible for withholding and paying withholding taxes can be held personally liable for any taxes due. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.