When it has come time for your business to hire its first employee, there are Iowa tax issues to keep in mind.Ā Every employer who maintains an office or transacts business in Iowa and who is required to withhold federal income tax on any compensation paid to employees for services performed in Iowa is required to withhold Iowa individual income tax from that compensation.
Prior to Starting the Hiring Process:
- If you donāt already have one, apply for a Federal Employer Identification Number (FEIN) with the IRS. https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
- Apply for an Iowa withholding tax permit at https://www.idr.iowa.gov/CBA/start.asp
If you have not received your FEIN prior to applying for the Iowa withholding tax permit, enter āApplied Forā in the FEIN field.
Once You Have Hired the Employee:
- Have employee(s) complete the IA W-4 form at the time of hire. The 2020 form is available at the following link:Ā Ā Ā https://tax.iowa.gov/sites/default/files/2019-12/2020IAW-4%2844019%29.pdf
- Withhold the appropriate tax from employeeās paychecks. See https://tax.iowa.gov/withholding-tax-information for withholding tax tables and instructions. A withholding calculator is available at: https://tax.iowa.gov/withholding-calculator
- Timely file returns and required deposits. Withholding due date calendars can be found at: https://tax.iowa.gov/iowa-withholding-due-date-calendars
- File an Iowa Verified Summary of Payments (VSP) annually via the Iowa Department of Revenue (IDR) eFile & Pay system. All taxpayers with withholding permits are required to complete this form.
- Submit W-2s to IDR annually. See https://tax.iowa.gov/electronic-filing-w-2-wage-statements-and-1099-information-returns for more information.
Failure to Withhold
A withholding agent who fails to withhold and pay to the Iowa Department of Revenue any money required to be withheld and paid is personally, individually and corporately liable to the State of Iowa.Ā If this occurs, the amount of withholding may be assessed against the withholding agent in the same manner as is used to assess personal or corporate income tax.
Ā
Iowa Income Tax Benefits Available When Hiring Certain Individuals
Iowa offers employers who meet specific criteria an additional deduction on their Iowa income tax returns for hiring ex-offenders or persons with disabilities.
What are the benefits?
- Iowa income tax deduction for 65% of the wages paid in the first 12 months of employment
- Maximum deduction of $20,000 per employee
- This benefit is in addition to the Targeted Jobs Tax Credit.
Ā
Ex-Offenders:
Who is an ex-offender?
- Has been convicted of a felony in Iowa or any other state or the District of Columbia or
- Is on parole or
- Is on probation for an offense other than a simple misdemeanor or
- Is in a work release program or
- Is still incarcerated or
- Qualifies under the interstate probation and parole compact or
- Is certified as an economically disadvantaged ex-offender for the Targeted Jobs Tax Credit
Who is a qualifying ex-offender?
- Can be any age; no restrictions
- Must be a new hire; a current employee who becomes an ex-offender does not qualify
- May hold more than one job; each employer may take the deduction
- Can be a full or part time employee
- Must pass the businessā probationary period, which is six months if an employer does not have a written policy
- Cannot be hired to replace another employee who was terminated within the previous 12 months, unless the termination was for misconduct in connection with employment. If the employee left voluntarily, the ex-offender qualifies.
How do I claim the income tax deduction?
The employer claims the deduction on the Iowa 1040 individual income tax return under āother adjustmentsā or on the Iowa corporation income tax return under āother reductionsā.Ā The following information must be provided with the return:
- Employeeās name
- Employeeās social security number
- Employeeās hire date
- Employeeās total wages
If I donāt claim the maximum amount during the year, can I claim the balance next year?
If 65% of the employeeās wages does not meet the $20,000 maximum in a single tax year, the balance may be claimed the following year as long as the employee worked fewer than 12 months the first year.
What if I have had an employee who is an ex-offender and was not aware of this benefit?
The employer may amend income tax returns to include the deduction as long as the amended returns are filed within 3 years from the due date of the return.
Persons with Disabilities
Who is a person with disability?
- Has a physical or mental impairment* which substantially limits one of more major life activities or
- Has a history of impairment* or
- Is regarded as having an impairment* or
- Qualifies for the targeted jobs tax credit as a person with a disability undergoing vocational rehabilitation or
- Has been certified by the State Division of Vocational Rehabilitation as having a disability
*impairment includes, but is not limited to, physiological disorders and conditions, cosmetic disfigurement, anatomical loss, and any mental or psychological disorder.
Who is a qualifying person with disability?
- Can be any age; no restrictions
- Must be a new hire; a current employee who becomes disabled does not qualify
- May hold more than one job; each employer may take the deduction
- Can be a full or part time employee
- Must pass the businessā probationary period, which is six months if an employer does not have a written policy
- Cannot be hired to replace another employee who was terminated within the previous 12 months, unless the termination was for misconduct in connection with employment. If the employee left voluntarily, the person with a disability qualifies.
Is there a limitation on the size of my business in order to qualify?
Yes.Ā Only employers who meet the āsmall businessā definition can claim the deduction for employing persons with disabilities.Ā To be considered a small business, the employer must have both of the following:
- 20 or fewer full-time equivalent employees. Full-time means any of the following:
- A position requiring an average work week of 40 hours
- One in which compensation is paid on a salaried full-time basis without regard to hours worked
- An aggregation of any number of part-time positions which equal one full-time position. See table below.
Full-time equivalent table
Hours:Ā more than 0, but less than 15: Ā¼ time
Hours: 15 or more, but less than 25:Ā Ā½ time
Hours 25 or more, but less than 35: Ā¾ time
Hours:Ā 35 or more: Full time
- Annual gross revenue of not more than $3 million. Annual gross revenue means total sales, before deducting returns and allowances but after deducting corrections and trade discounts, sales taxes, and excise taxes based on sales.
What is considered a qualifying business?
- Corporation
- Sole proprietorship
- Partnership
- Joint venture
- Association
- Cooperative
- Farm operations
- Cultivation of land for production of agricultural crops
- Raising poultry
- Production of eggs, milk, fruit, other horticultural crops
- Grazing or production of livestock
- Franchise owned by a local employer if the other criteria are met
What are considered non-qualifying businesses?
- Production of timber, forest products, nursery products, or sod
- Processor or distributor of farm products or supplies that provides spraying, harvesting, or other farm services
- Corporate-owned business managed by a local employer
- The practice of profession requiring specialized knowledge and preparation such as:
- Accounting
- Architecture
- Audiology
- Chiropractic
- Dental hygiene
- Dentistry
- Engineering
- Law
- Medicine
- Mortuary science
- Nursing
- Occupational therapy
- Optometry
- Osteopathic medicine
- Osteopathy
- Pharmacy
- Physical therapy
- Podiatry
- Psychology and psychiatry
- Speech pathology
- Surgery
- Surveying
How do I claim the income tax deduction?
The employer claims the deduction on the Iowa 1040 individual income tax return under āother adjustmentsā or on the Iowa corporation income tax return under āother reductionsā.Ā The following information must be provided with the return:
- Employeeās name
- Employeeās social security number
- Employeeās hire date
- Employeeās total wages
If I donāt claim the maximum amount during the year, can I claim the balance next year?
If 65% of the employeeās wages does not meet the $20,000 maximum in a single tax year, the balance may be claimed the following year as long as the employee worked fewer than 12 months the first year.
What if I have had an employee who is a person with a disability and I was not aware of this benefit?
The employer may amend income tax returns to include the deduction as long as the amended returns are filed within 3 years from the due date of the return.
About Americaās SBDC Iowa and the Author
Lisa Casper, Business Tax Counselor for Americaās SBDC Iowa, assists small businesses with questions relating to the
Iowa tax code. She provides advice on sales and use tax filings, Iowa tax law that affects small businesses, and general
services provided by the Iowa Department of Revenue. She also provides business consulting to help small businesses grow and succeed.
Americaās SBDC Iowa is an outreach program of Iowa State Universityās Ivy College of Business and the Office of
Economic Development and Industry Relations. Funded in part through a cooperative agreement with the U.S. Small
Business Administration, Americaās SBDC Iowa has 15 regional assistance centers located strategically across the
state. Since program inception in 1981, the SBDC has helped Iowa businesses and entrepreneurs through no fee,
confidential, customized, professional business counseling and practical, affordable training workshops.
For more information on Americaās SBDC Iowa programs or services, visit www.iowasbdc.org,
https://www.facebook.com/AmericasSBDCIowa, or @IowaSBDC on Instagram and Twitter.