What Is the Tax Rate for a Bonus in Iowa?

Receiving a bonus comes with tax implications. This form of compensation is considered a supplemental wage, meaning it is income earned in addition to your regular salary or hourly pay. Bonus payments are subject to income tax at both the federal and state levels, and understanding this tax requires looking at withholding rules.

Federal Withholding on Bonus Pay

Before any state tax is considered, federal rules dictate the initial tax withholding on your bonus. The Internal Revenue Service (IRS) provides employers with two main methods for calculating the amount of tax to withhold.

The most common approach, especially when a bonus is paid as a separate check, is the percentage method. Under this rule, employers withhold a flat 22% from any supplemental wage payments that, for the year, total under $1 million. If an individual receives more than $1 million in supplemental wages during a calendar year, the excess amount is subject to a higher withholding rate of 37%.

Alternatively, an employer can use the aggregate method. This involves combining the bonus payment with the employee’s regular wages for the same pay period and calculating the withholding on the total amount based on their Form W-4. This method is often used when a bonus is included in a regular paycheck. Regardless of the method, the bonus is also subject to FICA taxes for Social Security and Medicare.

Iowa State Withholding on Bonus Pay

After federal obligations are met, Iowa applies its own rules for withholding on supplemental wages. Following recent legislative changes, Iowa has moved to a flat tax system. Effective January 1, 2025, the state requires a flat withholding rate of 3.8% on supplemental wage payments like bonuses. For example, if an employee in Iowa receives a $5,000 bonus, the employer would withhold $190 for state income tax ($5,000 x 0.038).

Iowa also permits an aggregate method, mirroring the federal option. In this scenario, an employer would combine the bonus with the employee’s regular pay and use the Iowa Withholding Tables along with the employee’s IA W-4 to determine the appropriate amount to withhold from the total.

Withholding vs. Final Tax Liability

The amount withheld from a bonus is different from the actual tax owed. The withholding, whether the federal 22% or the Iowa 3.8%, is an estimated prepayment of your tax obligation, not the final tax rate on that income. The true tax impact of your bonus is determined when you file your annual income tax returns.

When you prepare your federal Form 1040 and Iowa IA 1040, the bonus income is added to all other sources of income for the year. This total income determines your marginal tax bracket, which dictates the rate at which your last dollar of income is taxed. The bonus is ultimately taxed at your specific marginal rate, which could be higher or lower than the initial withholding rate.

The total amount of tax withheld throughout the year is credited against your total calculated tax liability. If the total amount withheld exceeds what you owe, you receive a tax refund. Conversely, if the withholding was insufficient to cover your total tax liability, you will owe an additional payment to the IRS and the Iowa Department of Revenue. The bonus amount itself is reported by your employer and included in the total wages found in Box 1 of your Form W-2.