Your employer is doing it correctly. The reciprocity agreement between Illinois and Iowa means that Illinois residents who have W-2 wages from Iowa only have to pay taxes in their home state. If your only income from Iowa is w-2 wages or salary, then you only have to file taxes in your home state of Illinois. You do not have to file an Iowa return.
**Answers are correct to the best of my ability but do not constitute tax or legal advice.
