Composite returns and agreements are not required if the entity is a qualifying S-Corporation or partnership and elects to pay the Pass-Though Entity Tax (PTET). Trusts and estates are not eligible to make such an election.

New withholding requirements for 2022

Beginning with 2022, Iowa is following the lead of many other states in mandatory withholding for non-resident partners, S-Corporation owners, and beneficiaries of estates and trusts. This is accomplished through a mandatory filing of a composite tax return if pass-through entities have Iowa income with non-resident owners or beneficiaries.

Until this year, Iowa had optional composite tax returns, and mandatory withholding for people who failed to file their Iowa obligations. That option is now replaced with a mandatory system.

However, non-resident beneficiaries, owners and partners may still be exempted from the mandatory withholding requirement if they file a Nonresident Member Composite Agreement with the entity (not the state) affirming that they will file an Iowa tax return. Shareholders, beneficiaries and partners who file this form with the company, partnership, trust or estate will not have Iowa income tax withheld at the entity level, but must still file an Iowa income tax return (if required).

If the non-resident owner or beneficiary hasn’t filed a Composite Agreement with the entity, the entity is required to withhold at the top Iowa tax rate. The owner or beneficiary may claim that withholding credit on their Iowa income tax return.

Iowa’s website has detailed information about this new requirement.