GUIDE: START A BUSINESS IN IOWA | STEP SIX:
Federal, State and Local Taxes
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Taxes… YUCK! Unfortunately, as a business owner, you cannot avoid taxes. Taxes can seem very overwhelming to a new business owner. Because of that, it is always a good idea to speak with a tax professional or legal advisor when setting up your company.
If you operate a business in Iowa or the United States as a whole, you will have to pay taxes. There are two places where these taxes will likely be paid: the Internal Revenue Service (IRS) for federal taxes and the Iowa Department of Revenue (IDR) for state and local taxes. Refer to the tax section of our Get Your Business Online Guide for more information about sales tax outside of Iowa.
Internal Revenue Service (IRS)
What is a Federal Employer Identification Number (FEIN)?
A FEIN is essentially the social security number for your business. LLCs and corporations are required to obtain a FEIN. Other business entities may still want to get a FEIN because it can help prevent potential fraud and theft of your social security number. Unless you plan to operate as a sole proprietorship, most banks will require a FEIN in order to open a business bank account.
How do I get a FEIN?
FEINs are free to obtain through the IRS. You can apply via mail, which will take 4-6 weeks, or online to receive your FEIN number immediately.
Still have questions about FEINs?
Check out these helpful links below:
- How do you know if you need a FEIN?
- What do you do if you lost or misplaced your FEIN?
- Who is a Responsible Party?
SBDC Quick Tip: When you obtain your FEIN, either by mail or online, be sure to keep a copy of your FEIN document in a safe place. If you lose your number, the process of retrieving your number can be very time consuming!
Iowa Department of Revenue (IDR)
Depending on your business type, you may be subject to collecting and paying state taxes. Common state taxes include:
Most people need to obtain a Sales or Use Tax permit, but if you are unsure of whether you need one, you can read this webpage to learn.
Most often, you will file for the Iowa Tax Permit (also known as a Business eFile Number or BEN). Make sure to obtain your FEIN, if required, or have your Social Security number handy before filing for an Iowa Tax Permit! You can apply either online or by paper.
After you have your Iowa Tax Permit, learn about paying your collected taxes on the GovConnectIowa system and filing frequencies and due dates. Remember, receiving your permit in the mail can take 4-6 weeks, but you can begin collecting tax immediately once you submit your registration. Speak with a tax or legal advisor to learn more about collecting and remitting state and local taxes.
Iowa Sales Tax
In most areas of the state the sales tax rate is 6%. Local municipalities and counties potentially charge their own tax of 1% in addition to the state tax rate of 6%. Many Point of Sale (POS) systems, the device that facilitates the customers’ payments, have information built in to help you track this. If not, the Department of Revenue has an informational page that provides new start and sunset dates and a tax lookup tool so that you can calculate this information yourself.
If you have any questions about Iowa taxes, check out this Frequently Asked Questions page by the IDR. Additionally, every year our team hosts webinars with the IDR to explain tax and law updates, department updates, and tool tutorials.
Self-Employment Taxes
Unless your business is a corporation for tax purposes, you are classified as self-employed. When you are employed by a corporation, the corporation pays half of your employment tax and you pay the other half. Now, being self-employed, you pay both halves, meaning you will need to understand employment taxes such as Federal Income Tax, Social Security & Medicare, Additional Medicare Tax, and Federal Unemployment Tax. The IRS provides tools to help you determine how much you could owe in employment taxes and their due dates.
The Self-Employed Individuals Tax Center also provides many resources, including access to nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities and tips for finding a tax professional to assist you with your various returns. The IRS Video Portal contains video and audio presentations on topics for small businesses, individuals, and tax professionals.
Unemployment Taxes
If you have employees in the state of Iowa, you will need to pay unemployment taxes to the Iowa Workforce Development (IWD). The IRS’s classification page can help you determine if you have employees or independent contractors. To set up your unemployment tax account, access IWD’s myIowaUI and create your account. If you have questions, contact the IWD UI Tax Bureau at 888-848-7442 or email [email protected] and visit their Frequently Asked Questions page.
Do you have more questions?
Check out our Resource Navigator! It houses the contact information of 400 of our most helpful partners from across the state. Here are a few of our Resource Partners that specialize in aiding you the concept stage of your business. For example, discover resources such as the Small Business Development Centers. They provide no-cost confidential assistance to Iowa entrepreneurs and small business owners.
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NOTICE: The information included on this website is to be used only as a guide. It is not intended to cover all provisions of the law or every taxpayer's specific circumstances.
