(1)
Requirement of withholding.
a.
General rule. Every
employer maintaining an office or transacting business within this state and
required under provisions of Sections
3401 to
3404 of the Internal Revenue Code to
withhold and pay federal income tax on compensation paid for services performed
in this state to an individual is required to deduct and withhold from such
compensation for each payroll period (as defined in Section
3401(b) of the Internal
Revenue Code) an amount computed in accordance with subrules 307.2(1) and
307.2(2). Iowa income tax is not required to be withheld on any compensation
paid in this state of a character which is not subject to federal income tax
withholding (whether or not such compensation is subject to withholding for
federal taxes other than income tax, e.g., FICA taxes), except as provided in
rule
701-307.4 (422).
b.
Examples. Paragraph
"a" above may be illustrated by the following examples:
(1) Temporary help. A is a typist in the
offices of B corporation, where she has worked regularly for two months. A is,
however, supplied to B corporation by C, a temporary help agency located in
Iowa. C renders a weekly bill to B corporation for A's services, and C then
pays A. B corporation is not A's "employer" within Section
3401(d) of the Internal
Revenue Code, and B corporation is therefore not required by the Internal
Revenue Code to withhold a tax on A's compensation. Since B corporation is not
required to withhold a tax for federal purposes on A's compensation, B is not
required to do so for Iowa purposes. C, the temporary help agency, however, is
required to withhold from A's compensation for federal purposes and must also
do so for Iowa purposes.
(2)
Domestic help. A is employed as a cook by Mr. and Mrs. B. The B's are required
to withhold FICA (i.e., Social Security) tax from compensation paid to A, but
are not required to withhold income tax from such compensation under the
Internal Revenue Code, because under Section 3401(a)(3), A's compensation does
not constitute "wages". Since the B's are not required to withhold income tax
for federal purposes, they are not required to do so for Iowa
purposes.
(3) Executives. A is a
corporate executive. On January 1, 1998, A entered into an agreement with B
corporation under which he was to be employed by B in an executive capacity for
a period of five years. Under the contract, A is entitled to a stated annual
salary and to additional compensation of $10,000 for each year. The additional
compensation is to be credited to a bookkeeping reserve account and deferred,
accumulated and paid in annual installments of $5,000 on A's retirement
beginning January 1, 2003. In the event of A's death prior to exhaustion of the
account, the balance is to be paid to A's personal representative. A is not
required to render any service to B after December 31, 2002. During 2003, A is
paid $5,000 while a resident of Iowa. The $5,000 is not excluded from "wages"
under Section
3401(a) of the Internal
Revenue Code; therefore, B is required to withhold federal income tax, and,
since it is compensation paid in this state, B must withhold Iowa income tax on
A's deferred compensation.
(4)
Agricultural labor. 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.
c.
Exemption from
withholding. An employer may be relieved of the responsibility to
withhold Iowa income tax on an employee who does not anticipate an Iowa income
tax liability for the current tax year.
An employee who anticipates no Iowa income tax liability for
the current tax year shall file with the employer a withholding allowance
certificate claiming exemption from withholding. An employee who meets this
criterion may claim an exemption from withholding at any time; however, this
exemption from withholding must be renewed by February 15 of each tax year that
the criterion is met. If the employee wishes to discontinue or is required to
revoke the exemption from withholding, the employee must file a new withholding
allowance certificate within ten days from the date the employee anticipates a
tax liability or on or before December 31 if a tax liability is anticipated for
the next tax year. Subrule 307.3(3) contains more information.
d.
Withholding from
lottery winnings. Every person, including employees and agents of the
Iowa lottery authority, making any payment of "winnings subject to withholding"
shall deduct and withhold a tax in an amount equal to 5 percent of the
winnings. The tax shall be deducted and withheld upon payment of the winnings
to a payee by the person or payer making this payment. Any person or payee
receiving a payment of winnings subject to withholding must furnish the payer
with a statement as is required under Treasury Regulation §31.3402(q)-1,
paragraph "e," with the information required by that paragraph. Payers of
winnings subject to withholding must file Form W-2G with the Internal Revenue
Service, the department of revenue, and the payee of the lottery winnings by
the dates specified in the Internal Revenue Code and in Iowa Code section
422.16. The W-2G form shall
include the information described in Treasury Regulation §31.3402(q)-1,
paragraph "f."
"Winnings subject to withholding" means any payment where the
proceeds from a wager exceed $600. The rules for determining the amount of
proceeds from a wager under Treasury Regulation Section 31.3402(q)-1, paragraph
"c," shall apply when determining whether the proceeds from Iowa lottery
winnings are great enough so that withholding is required. This rule shall
apply to winnings from tickets purchased from the Powerball and Hot Lotto games
or any other similar games to the extent the tickets were purchased within the
state of Iowa.
e.
Withholding from prizes from games of skill, games of chance, or
raffles. Every person making any payment of a "prize subject to
withholding" must deduct and withhold a tax in an amount equal to 5 percent of
the prize from a game of skill, a game of chance, or a raffle. Effective July
1, 2015, any person making any payment of a "prize subject to withholding" for
bingo must withhold tax in the same manner as persons making payments of prizes
subject to withholding for games of skill, games of chance, or raffles. The tax
must be deducted and withheld upon payment of the winnings to a payee by the
person making this payment. Any person or payee receiving a payment of winnings
subject to withholding must furnish the payer with a statement as is required
under Treasury Regulation Section 31.3402(q)-1, paragraph "e," with the
information required by that paragraph. Payers of prizes subject to withholding
must file Form W-2G with the Internal Revenue Service, the department of
revenue, and the payee of the prize by the dates specified in the Internal
Revenue Code and in Iowa Code section
422.16. The W-2G form must
include the information described in Treasury Regulation Section 31.3402(q)-1,
paragraph "f."
"Prizes subject to withholding" means any payment of a prize
where the amount won exceeds $600.
f.
Withholding from winnings from
pari-mutuel wagers. Every person making any payment of "winnings
subject to withholding" must deduct and withhold a tax in an amount equal to 5
percent of the winnings from pari-mutuel wagers. The tax must be deducted and
withheld upon payment of the winnings to a payee by the person making this
payment. Any person or payee receiving a payment of winnings subject to
withholding must furnish the payer with a statement as is required under
Treasury Regulation Section 31.3402(q)-1, paragraph "e," with the information
required by that paragraph. Payers of winnings subject to withholding must file
Form W-2G with the Internal Revenue Service, the department of revenue, and the
payee of the winnings by the dates specified in the Internal Revenue Code and
in Iowa Code section
422.16. The W-2G form must
include the information described in Treasury Regulation Section 31.3402(q)-1,
paragraph "f."
"Winnings subject to withholding" are winnings in excess of
$1,000.
g.
Withholding from winnings from slot machines on riverboat gambling
vessels and from winnings from slot machines at racetracks.
Withholding of state income tax is required if the winnings from slot machines
on riverboat gambling vessels or from slot machines at racetracks exceed
$1,200.
(2)
Withholding on pensions, annuities and other nonwage payments to Iowa
residents. State income tax is required to be withheld from payments
of pensions, annuities, supplemental unemployment benefits and sick pay
benefits and other nonwage income payments made to Iowa residents in those
circumstances mentioned in the following paragraphs. This subrule covers those
nonwage payments described in Sections
3402(o),
3402(p),
3402(s),
3405(a),
3405(b), and
3405(c) of the Internal
Revenue Code. This includes, but is not limited to, payments from
profit-sharing plans, stock bonus plans, deferred compensation plans,
individual retirement accounts, lump-sum distributions from qualified
retirement plans, other retirement plans, and annuities, endowments and life
insurance contracts issued by life insurance companies. These payments are
subject to Iowa withholding tax if they are also subject to federal withholding
tax. However, no state income tax withholding is required from nonwage payments
to residents to the extent those payments are not subject to state income tax.
In the case of some nonwage payments to residents, such as payments of pensions
and annuities, no state income tax is required to be withheld if no federal
income tax is being withheld from the payments of the pensions and annuities.
For purposes of this subrule, an individual receiving nonwage
payments will be considered to be an Iowa resident and subject to this subrule
if the individual's permanent residence is in Iowa. The fact that a nonwage
payment is deposited in a recipient's account in a financial institution
located outside Iowa does not mean that the recipient's permanent residence is
established in the place where the financial institution is situated.
Payers of pension and annuity benefits and other nonwage
payments have the option of either withholding Iowa income tax from these
payments on the basis of tables and formulas included in the Iowa withholding
tax guide of the department of revenue or withholding Iowa income tax from
these payments at the rate of 5 percent.
a.
Withholding from pension and
annuity payments to residents. Withholding of state income tax is
required from payments of pensions and annuities to Iowa residents to the
extent that the recipients of the payments have not filed with the payers of
the benefits election forms which specify that no federal income tax is to be
withheld. Therefore, state income tax is to be withheld when federal income tax
is being withheld from the pensions or annuities.
However, although Iowa income tax is ordinarily required to
be withheld from pension and annuity payments made to Iowa residents if federal
income tax is being withheld from the payments, no state income tax is required
to be withheld if pension and annuity payments are not subject to Iowa income
tax, as in the case of railroad retirement benefits which are exempt from Iowa
income tax by a provision of federal law or retirement distributions subject to
the retirement income exclusion described in rule
701-302.47 (422).
b.
Withholding from
payments to residents from profit-sharing plans, stock bonus plans, deferred
compensation plans, individual retirement accounts and from annuities,
endowments and life insurance contracts issued by life insurance
companies. Payments to Iowa residents from profit-sharing plans, stock
bonus plans, deferred compensation plans, individual retirement accounts and
payments from life insurance companies for contracts for annuities, endowments
or life insurance benefits are subject to withholding of state income tax if
federal income tax is withheld from the benefits. However, no state income tax
is to be withheld from the income tax payments described above to the extent
those income tax payments are exempt from Iowa income tax. Rule
701-302.47 (422) provides more
information about the retirement income exclusion.
In cases where the recipients elect withholding of state
income tax from the income payments, the payers are to withhold from the
payments at a rate of 5 percent on the taxable portion of the payment, if that
can be determined by the payer or on the entire income payment if the payer
does not know how much of the payment is taxable. Once a recipient makes an
election for state income tax withholding, that election will remain in effect
until a later election is made.
c.
Withholding from payments to
residents for supplemental unemployment compensation benefits and sick pay
benefits. Income payments made for supplemental unemployment
compensation benefits described in Section
3402(o)(2)(a) of the
Internal Revenue Code and for sick pay benefits are subject to withholding of
state income tax. In the case of supplemental unemployment compensation
benefits, those benefits are treated as wages for purposes of state income tax
withholding. Therefore, state income tax should be withheld from these payments
when federal income tax is withheld. The amount of state income tax withholding
should be determined by the withholding tables provided in the Iowa employers'
"Withholding Tax Guide."
In the case of state income tax withholding for sick pay
benefits paid by third-party payers in accordance with Section
3402(o)(1) of the Internal
Revenue Code, state income tax is to be withheld from the benefits by the payer
only if state income tax withholding is requested by the payee of the benefits.
If withholding is requested by the payee, the withholding should be done at a 5
percent rate on the sick pay benefits. Once withholding is started, it should
continue until such time as the payee requests that no state income tax be
withheld. For sick pay benefits not paid by third-party payers, state income
tax is required to be withheld since federal income tax is required to be
withheld.
d.
Voluntary state income tax withholding from unemployment benefit
payments. Recipients of unemployment benefit payments described in
Section
3402(p)(2) of the Internal
Revenue Code may elect to have state income tax withheld from the benefit
payments at a rate of 5 percent. An individual's election to have state income
tax withheld from unemployment benefits is separate from any election to have
federal income tax withheld from the benefits.
e.
Withholding on lump-sum
distributions from qualified retirement plans. For lump-sum
distribution payments from qualified retirement plans made to Iowa residents,
state income tax is required to be withheld under the conditions described in
this paragraph. No state income tax is required to be withheld from a lump-sum
distribution payment to an Iowa resident in a situation where the payment is
not subject to Iowa income tax. Rule
701-302.47 (422) provides more
information about the retirement income exclusion. Iowa income tax is to be
withheld from a lump-sum distribution made to an Iowa resident to the extent
that federal income tax is being withheld from the distribution. The rate of
withholding of state income tax from the lump-sum distribution is 5 percent
from the total distribution or 5 percent from the taxable amount if that amount
is known by the payer. Note that in the case of a lump-sum distribution, the
Iowa income tax imposed on the taxable amount of the distribution is 25 percent
of the federal income tax on the distribution.
f.
Withholding of state income tax
from nonwage payments to residents on the basis of tax tables and tax
formulas. State income tax from the nonwage payments made to Iowa
residents may be withheld on the basis of formulas and tables included in the
Iowa withholding tax guide of the department of revenue. When state income tax
is being withheld based upon the formulas or tables in the withholding guide,
the amounts of the nonwage payments are treated as wage payments for purposes
of the tables or the formulas.
The frequency of the nonwage payments determines which of the
withholding tables to use or the number of pay periods in the calendar year to
use in the formula. For example, if the nonwage payment is made on a monthly
basis, the monthly wage bracket withholding table should be utilized for
withholding or 12 should be utilized in the formula to indicate that there will
be 12 nonwage payments in the year.
The payers of nonwage payments should withhold state income
tax from the nonwage payments to Iowa residents when federal income tax is
being withheld from the nonwage payments. The payers should withhold from the
nonwage payments to Iowa residents from tables or the formulas in the Iowa
withholding guide on the basis of the number of withholding exemptions claimed
on Form IA W-4 which has been completed by the payees of the payments. However,
if a payee of a nonwage payment has not completed an IA W-4 form (Iowa
employee's withholding allowance certificate) by the time a nonwage payment is
to be made by the payer of the nonwage payment, the payer is to withhold state
income tax on the basis that the payee has claimed one withholding allowance or
exemption.
In a situation when a payee of a nonwage payment completes
Form IA W-4 and claims exemption from state income tax withholding when federal
income tax is being withheld from the nonwage payment, the payer of the nonwage
payment should withhold state income tax using one withholding allowance or
exemption unless the payee has verified exemption from state income tax.
g.
Withholding on
distributions from qualified retirement plans that are not directly rolled
over. Other than distributions to payees who qualify for the
retirement income exclusion, state income tax is to be withheld at a rate of 5
percent from the gross amount or taxable amount if known by the payer of the
distribution made to Iowa residents if the distributions are not transferred
directly to an IRA, Section 403(a) annuity or another qualified retirement
plan. The distributions that are subject to state income tax withholding are
those distributions that are subject to 20 percent withholding for federal
income tax purposes. Rule
701-302.47 (422) provides more
information about the retirement income exclusion.
This rule is intended to implement Iowa Code sections
96.3,
99B.8,
99D.16,
99F.18,
99G.31,
422.5,
422.7, and
422.16.
