Iowa LLC Taxes
When You Want More
Iowa LLCs are taxed as pass-through entities by default. This means that the profits (and losses) pass-through the LLC and onto the personal tax filings of the LLC members, who are also responsible for paying self-employment taxes (Social Security and Medicare) of 15.3%. Members can also expect to pay Iowa’s flat income tax of 3.9% on LLC income. This guide will show you some of the taxes your LLC can expect to pay in Iowa.
In this article, we’ll cover:
How Are Iowa LLCs Taxed?
A single-member LLC (SMLLC) is by default taxed as a sole proprietorship. A multi-member LLC is taxed as a partnership. This means that the profits and losses of the business pass to the tax returns of each LLC member. While the LLC isn’t required to file tax forms, LLC members will need to file one of these forms:
- Single-member LLC—Form 1040 (usually Schedule C, but some SMLLCs file C-EZ, E, or F)
- Multi-member LLC—Form 1065
An Iowa LLC can also elect to be taxed as an S-corp or C-corp. We’ll explain what that means for your LLC.
Iowa LLCs taxed as S-corp
LLCs can elect to be taxed as S-corps. An S-corp reduces the tax bill of LLC members by dividing their business income into two groups: dividends, and a reasonable salary. The salary portion of their income will be subject to the 15.3% self-employment tax, but the dividend portion will remain untouched by self-employment taxes. To be eligible for S-corp taxation, your LLC must meet certain IRS requirements. LLCs file Form 2553 with the IRS to elect S-corp status, and S-corps will report their income by filing Form 1120-S. It’s also a good idea to consult a tax professional before making the move to an S-corp.
LLCs taxed as C-corp
An Iowa LLC can also elect to be taxed as a C-corp (the default tax status for corporations). This election isn’t nearly as popular as an S-corp election, but some LLC owners may find they benefit from the tax deductions and increased investment opportunities that come with being taxed as a C-corp. C-corps will file Form 1120 with the IRS, and they’ll pay the 21% federal corporate income tax as well as Iowa’s graduated 5.5-8.4% corporate income tax. Consult a tax professional before you change your LLC’s tax status.
Iowa State Income Tax
If you’re filing under default LLC or S-corp status, you’ll pay individual income tax in Iowa, which is a flat 3.9%. Each LLC member will need to file Form IA-1040 to report their portion of LLC income to the state. If your LLC has elected to be taxed as a C-corp, each member will need to pay the Iowa corporate income tax (Form IA-1120) on all taxable earnings:
|Taxable Earnings||Corporate Tax Rate|
|$0 to $100,000||5.5%|
|$101,000 to and up||8.4%|
Sales and Use Tax
You’ll need to apply for an Iowa Tax Permit in order to collect the state’s 6% sales tax (only 1% for groceries and prescription drugs). You can apply online through Iowa’s Business Registration System or you can fill out and submit an Iowa Business Tax Permit. Registering with the state allows you to collect sales and use taxes from customers, and remit them to Iowa’s Department of Revenue on a quarterly basis.
Local Iowa Taxes
As a business owner, you’ll want to make sure that your LLC is keeping up with state and local taxes. While the base sales tax in Iowa is 6%, some counties are allowed to levy their own sales tax up to 1%. Each county in Iowa can also levy their own taxes on things like short-term rental properties, alcohol, tobacco, and even fuel. Your best bet is to call or email your county clerk’s office to find out what local sales taxes you’ll need to collect.
Other Taxes in Iowa
Now that you’ve got a handle on federal, state, and local taxes, you’ll want to be aware of some other taxes that are imposed by the state of Iowa.
Iowa State Employer Taxes
If your LLC has employees, you’ll need to budget for unemployment insurance and workers’ compensation taxes:
- Unemployment Insurance (UI) Tax— You’ll need to pay unemployment insurance (UI) taxes for your business if your LLC hires employees. UI taxes are levied at the federal level through the Federal Unemployment Tax Act (FUTA), and at the state level as State Unemployment Insurance (SUI). Iowa’s unemployment insurance tax rates range from 0% to 9%.
- Workers’ Compensation— In accordance with Iowa’s Worker’s Compensation Law, any business with at least one part- or full-time employee must purchase workers’ compensation insurance. Workers’ compensation insurance covers medical expenses and lost income for employees who are injured on the job. Rates vary based on the type of work the LLC is involved in, and the number of employees the LLC covers.
To learn more about Iowa employer taxes, visit the Iowa Division of Labor website.
If your LLC engages in an industry that is heavily regulated, either by the state or the federal government, you’ll want to check Iowa’s Department of Revenue for a list of industry-specific taxes you might need to pay. Here are just a few industry taxes your LLC might encounter:
- Automobile Rental Tax
- Drug Stamp Tax
- Cigarette Tax
- Fuel Tax
- Local Motel and Hotel Tax
- Liquor Sales Tax
- Real Estate Transfer Tax
Do foreign LLCs in Iowa need to pay Iowa taxes?
Yes, a Iowa foreign LLC will be expected to pay taxes on any income earned in Iowa. A foreign LLC is a business formed outside of Iowa but does business in Iowa. Foreign LLCs will also want to check with the local government office in the jurisdiction where the LLC has set up a physical location to see if it needs to register for local taxes.