A Complete Guide to Arizona Payroll Taxes

Whether you're running a business in Arizona or whether you're independently hiring employees, as an employer, you need to be clear about Arizona payroll taxes. What are payroll taxes? In simple terms, payroll taxes are taxes you have to pay to the government on behalf of your employees. These taxes usually contribute to things like social security and medical insurance, as well as employees' income tax dues.

When you're putting so much effort into keeping your business profitable, you don't want to end up paying penalties or interest because of glitches in payroll taxes. Managing state payroll taxes along with federal payroll taxes isn't as daunting once you're clear about the basics. That's why it's so important to stay up-to-date with your state payroll tax regulations.

This article will help you understand Arizona payroll tax requirements. It covers the following topics:

What Payroll Taxes Do You Have to Pay in Arizona?

1. Arizona Withholding Taxes

A withholding tax is an amount that you deduct from your employees' wages and pay to the government as a part of your payroll taxes. If you're employing people who are carrying out a service for you in Arizona, you have to pay Arizona withholding tax. This amount goes towards their income tax dues. This state withholding tax is in addition to federal withholding tax, which you have to pay under FICA, described further below.

2. State Unemployment Insurance Tax

State unemployment insurance tax is one of the payroll taxes you pay as an employer towards unemployment insurance benefits for employees. As a part of payroll taxes, Arizona employers have to pay state unemployment insurance tax (SUTA). This is in addition to a federal unemployment insurance tax FUTA which is given below under federal payroll taxes.

3. Applicable Federal Payroll Taxes

As an Arizona employer, you have to pay not just Arizona payroll taxes but also the applicable federal payroll taxes. These include the Federal Unemployment Insurance Tax (FUTA), as well as payroll taxes mandated by FICA (Federal Insurance Contributions Act), which go towards Social Security and Medicare. You also pay withholding taxes towards federal income tax.

Arizona Payroll Taxes: Arizona Withholding Taxes

State withholding taxes form an important part of your payroll taxes. In Arizona, if you are paying your employees wages, salaries, bonuses, or any other payments for their services, you need to pay Arizona withholding taxes.

What are Arizona Withholding Taxes?

Arizona withholding taxes are basically Arizona income taxes that are withheld from wages and paid by an employer to the state. These withholding taxes are adjusted towards employees' income tax dues.

Simply put, you are withholding Arizona income tax amounts from your employees' wages and paying it to the state as a part of your Arizona payroll taxes. So as an employer, you need to deduct this amount from employees' wages and include it in your payroll taxes.

However, keep in mind that Arizona withholding tax only applies if the employees are performing the services in Arizona. So if you are paying them for services they are performing outside Arizona, you may not have to withhold Arizona income tax from it.

Understand Gross Taxable Wages

Keep in mind that for Arizona income taxes and Arizona withholding taxes, the wages of the employee are the gross taxable wages. Arizona withholding taxes are calculated as a percentage of the employee's gross taxable wages. The amount considered to be the wage for federal income taxes (that is, the gross taxable wage) is also the wage for Arizona income taxes.

You can check the employee’s IRS Form W-2 (which is for federal income taxes), which they have to fill up when they are first hired. The amount that constitutes their wages for income taxes will usually be included in that form. Make sure you get your employees to fill up this Form W-2 as it contains useful information for your payroll taxes. Otherwise, you can calculate the gross taxable wages by seeing how to do it online.

Register your Employee Identification Number

If you're just getting started with your Arizona payroll taxes, then the first step is to register your Employee Identification Number (EIN) with the Arizona Department of Revenue (ADOR). This will enable you to start filing withholding returns.

To register, you need to file the Arizona Form JT-1, available on the ADOR website. You can file this form online. Filing Arizona Form JT-1 is an important first step in Arizona payroll taxes because it also begins the process of registering with the Arizona Department of Economic Security for filing unemployment tax, which is described further below.

Once registered with ADOR, your business' withholding ID number with the ADOR will be the company's EIN.

Determine the withholding tax amount - Form A-4

For you to determine the amount to withhold from wages, your employee will have to fill out Arizona Form A-4 and submit it to you. It will indicate to you the amount that you need to deduct from his/her pay for Arizona withholding tax.

Paying the withholding tax to the ADOR

As an employer, you will need to pay the amount you withheld to the ADOR. This procedure is also referred to as depositing your withholding tax. When remitting this amount to the ADOR, you will have to follow a certain payment schedule.

So the next step would be to find out which payment schedule you need to follow. Depending on the amount of withholding tax you have to pay, it would be either annual or quarterly payments or payable when you pay your federal withholding tax. Keep in mind that you can make the payment through an electronic fund transfer from your bank if the amount exceeds $500 in a taxable year.

Filing Arizona withholding tax returns

You will need to file Arizona withholding tax returns online by entering the details of the forms online. The form you need to file would depend on the payment schedule you are following for depositing your withholding tax.

The forms for Arizona withholding taxes are as follows:

Annual payments - Form A1-APR
Quarterly payments or payments whenever you pay Federal withholding tax - Form A1-QRT and Form A1-R
For both cases - Federal Forms W-2 and W-2c that report Arizona wages paid and Arizona income tax withheld, and federal Forms W-2G and 1099 (which are also for income tax withholding) need to be filed when filing forms A1-R or A1-APR and must be included in the returns
Note: Form W-2 is where you report wages you paid and give information about the taxable wages and the Arizona income taxes you withheld during the year

Arizona Payroll Taxes: Unemployment Insurance Tax

What is Arizona Unemployment Insurance Tax?

As a part of Arizona payroll taxes, employers have to pay state unemployment insurance tax (SUTA). Keep in mind that unlike withholding tax, unemployment insurance tax cannot be withheld from employees’ wages.

Most Arizona employers will have to pay state unemployment insurance tax on the first $7,000 (of gross wages) paid to each employee in a calendar year.

Who has to pay Arizona Unemployment Insurance Tax?

Arizona Unemployment Insurance Tax applies whether you are an individual employer or whether you have a business that is a partnership, corporation, Limited Liability Company (LLC), or any other entity for which an employee performs services. As an employer, if you meet any of the following conditions, you have to pay unemployment insurance tax:

You pay wages amounting to at least $1,500 during a calendar quarter
You employ at least one employee for some part of a day in 20 different weeks in a calendar year
You acquire the business or part of the business of an employer who is paying unemployment taxes
You pay Federal Unemployment Tax - FUTA (because you employ people in another state or for any other reason)
You own or control two or more businesses in Arizona that together meet any of the above conditions

In any case, the Department of Economic Security will inform you if you are liable to pay Arizona unemployment insurance tax when you register with it.

Registering and getting your UI number

When you begin your business, you register with the Arizona Department of Economic Security (DES) and the Arizona Department of Revenue (ADOR), as mentioned earlier in this article. You file Arizona Form JT-1.

The DES will determine if you are liable to pay Arizona Unemployment Insurance taxes. The DES will then mail you a “Determination of Unemployment Insurance Liability” which will tell you if you have to pay unemployment insurance tax for your employees. It will also let you know your tax rate and your Arizona Unemployment Insurance (UI) employer number.

Reporting wages and filing taxes

Once you get your UI number and you are declared liable to pay unemployment insurance tax, you will have to start filing quarterly unemployment tax and wage reports (in Form UC-018).

This means that you must report all gross wages of your employees in that quarter and file unemployment taxes for all taxable wages you pay. Note that you will also have to file for quarters where no wages were paid. You can submit your filing for unemployment tax and your wage reports online.

In your wage reports, the payments you include are salaries, commissions, bonuses, fees, fringe benefits, sick pay, tips reported to you by your employees, and the cash value of any non-cash benefits like gifts.

Certain payments are specifically not to be included in your wage reports. These include:

Long term disability pay
Payments made towards certain retirement plans for employees

You will need to have certain details ready when filling in your wage reports. These include:

The calendar quarter and the year for which the wage report is being filed
Your employees' social security numbers and names
The total amount of wages paid to each of your employees during that quarter
The total amount of wages paid to all of your employees during that quarter

In any case, these are details that you will have to keep at hand for your payroll taxes. You will also need to keep your UI number (also called Employer Account Number) at hand, as this will have to be mentioned.

Paying Arizona Unemployment Insurance Taxes

In your wage reports, you report the total gross wages that you paid to all your employees in that quarter. However, you pay taxes on only the taxable wages, that is, the first $7,000 paid to each employee in the calendar year. The form will help you calculate the taxable wage amount.

You can pay the unemployment insurance taxes online at the same time as you do the filing and reporting of wages, or you can make the payment separately from your report filing. Bear in mind that your unemployment insurance taxes and your wage report are due at the same time.

Arizona Payroll Taxes: Applicable Federal Taxes

Just because you're paying state payroll taxes doesn't mean that you are exempt from paying federal payroll taxes. The IRS is still going to be waiting for your FICA, FUTA, and FIT taxes. These are given below.

Federal payroll taxes: FICA

As an employer, you have to pay withholding tax towards Social Security and Medicare under the Federal Insurance Contributions Act (FICA).

What this means is that you have to withhold a certain percentage of your employees' gross taxable wages for Social Security and a certain percentage for Medicare and pay these amounts as Federal payroll taxes under FICA.

However, keep in mind that in both cases (Social Security and Medicare), you have to match the amount you withheld by paying that same amount yourself along with the withheld amount to the IRS. For additional Medicare (an additional withholding tax you may have to pay for Medicare), you don't have to match the amount yourself.

You can usually record the amounts you paid for FICA matching as a payroll expense, being part of an employee's compensation. However, check the IRS rules to be sure because in a few cases, like in the case of a manufacturing business, it will not be considered a payroll expense.

Federal payroll taxes: FUTA

As an employer, you alone pay the Federal Unemployment Insurance Tax (FUTA). Your employees don't.

But if you pay your state unemployment tax in full and on time each quarter, you can claim a big tax credit on FUTA, which reduces your FUTA tax substantially. Another reason to stay on top of your state payroll taxes!

Federal payroll taxes: FIT

Remember the IRS Form W-4, which your employees fill in when they first join? That's for the Federal Income Tax (FIT), which you have to withhold from their wages and pay to the IRS. The form will let you know the amount you have to withhold from the employees' wages for Federal Income Tax. You then have to pay this amount as a part of your federal payroll taxes.

Arizona Payroll Taxes: Record-Keeping

It's always a good practice to keep records of your payroll taxes. Arizona law requires you to keep records for the four most recent calendar years. You will need to keep records of:

Check stubs and canceled checks for all the payments you make to employees
Cash receipts
Payroll journal
General journal and general ledger
Copies of all the tax reports you have filed with federal and state agencies.
Copies of Forms W-2(s) and W-3(s)

This is in addition to the information you need to record about your employees, such as:

Names and social security numbers
Dates of payment
Amount of payment
Bonuses given
Place of service

Arizona Payroll Taxes: Summing Up

As an Arizona employer, it is you who will have to handle the nitty-gritty of the state's payroll taxes. That, in addition to IRS payroll taxes, may seem like a lot, but it actually isn't once you nail the basics. Know your Arizona basics like the key forms and the quarterly or annual filings. Keep your two tax account numbers at hand - the EIN number and the UI number.

Know your departments: the Arizona Department of Revenue for Arizona income tax withholding and the Department of Economic Security for unemployment insurance tax. Payroll taxes are usually recovered from the employees' wages but certain costs may ultimately be shared between you and your employees, depending on your employment policy.

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Key Takeaways

As an Arizona employer, you will have to pay three kinds of payroll taxes: Arizona withholding taxes, state unemployment insurance tax, and applicable federal payroll taxes. Once you register with the two departments (the ADOR and the DES), you begin your filings
The state withholding taxes are basically Arizona income tax that you withhold from your employees and pay towards their Arizona income tax liability. These taxes can be paid as quarterly or annual payments or whenever you pay your federal withholding taxes
The form you have to file would differ based on how often you pay. When filing and paying state unemployment insurance tax (SUTA), you will have to report wages as well
The applicable federal payroll taxes are FICA tax for Social Security and Medicare, Federal Income Tax through form W-4, and FUTA for federal insurance tax. Make sure you get the relevant details from your employees and keep records of important information, receipts, dates, and forms