On the Iowa 1040, taxpayers are required to add federal self-employment tax for the current year into income for Iowa purposes. Why does Iowa require this?
Joe the Window Washer is self-employed. In 2015, he received a federal tax refund of $1,000. In 2016, he owed federal self-employment tax of $5,000.
On his 2016 Iowa tax return, Joe will have to claim the $1,000 refund as income (remember, Iowa taxes federal tax refund) AND he’ll have to claim the $5,000 of self-employment tax as income as well.
Iowa makes taxpayers claim federal tax refunds as income because Iowa allows a deduction in full for federal income taxes paid.
The word “income” is put in bold letters for a reason.
Self-employment tax is NOT an income tax, it’s a FICA tax. Iowa doesn’t allow a deduction for FICA taxes paid.
So, Iowa makes you add self-employment tax to income, to ensure that any federal tax payments you’re deducting “net out” to the amount of income tax liability you had.
Joe the WIndow Washer is self-employed. His 2016 self-employment tax comes to $5,000, his income tax liability comes to $4,000, and he made $10,000 of federal estimated tax payments.
On his Iowa tax return, Joe will claim a deduction for the entire $10,000 of estimated tax payments, even though $5,000 of that payment ended up being applied to self-employment tax.
Joe can deduct the entire $10,000, but has to claim the $5,000 of self-employment tax as income, so that the net result is no deduction for the SE/FICA portion of his tax liability.