The Complete Guide To Arizona State Taxes & Payroll Taxes

Arizona payroll can be easier than payroll in some states, but employers still need to handle federal payroll taxes, Arizona income tax withholding, unemployment insurance, new-hire reporting, minimum wage rules, paid sick time, workers’ compensation, and payroll recordkeeping.

This guide breaks down the Arizona payroll taxes and labor laws small business owners need to know.

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Does Arizona Have State Income Tax?

Arizona has a flat individual income tax rate of 2.5%, and employers generally must withhold Arizona income tax from employee wages.

Arizona also has a 4.9% corporate income tax, but corporate income tax is separate from payroll taxes.

Federal & State Payroll Taxes In Arizona

Arizona employers may need to handle federal payroll taxes, Arizona income tax withholding, unemployment insurance, and required payroll deductions.

Arizona businesses may also be responsible for other taxes, such as corporate income tax, transaction privilege tax, use tax, luxury tax, or property tax, but those are separate from payroll taxes.

Arizona State Tax Exclusions & Exemptions

Arizona has many business tax exemptions, but most apply to taxes such as property tax, transaction privilege tax, use tax, fuel tax, or luxury tax. Those are separate from payroll taxes.

For payroll, Arizona employers should focus on whether specific wages are subject to Arizona income tax withholding. In some cases, employers may not need to withhold Arizona income tax from wages paid to certain workers, including:

• Certain nonresident employees of common carriers
• Domestic workers in private homes
• Casual laborers
• Some part-time or seasonal agricultural workers
• Certain nonresident employees of out-of-state businesses
• Nonresident employees working in Arizona for fewer than 60 days in a calendar year
• Nonresidents temporarily performing disaster recovery work after a declared disaster
• Certain nonresidents working on movie productions when the employer has been granted exemption status

Individual taxpayers may also qualify for Arizona personal exemptions or credits, such as exemptions related to age, blindness, or dependents. However, those individual tax benefits are separate from an employer’s payroll withholding responsibilities.

When in doubt, employers should use Arizona’s withholding tax guidance or speak with a tax professional before assuming wages are exempt from withholding.

Arizona Labor Laws & Other HR Requirements

Arizona employers need to follow state and federal labor laws covering minimum wage, unemployment tax, new-hire reporting, child labor, paid sick time, payday rules, workers’ compensation, meal breaks, jury duty, and anti-discrimination protections.

How To Calculate Payroll Taxes In Arizona

Once you understand Arizona’s payroll taxes and labor rules, running payroll comes down to collecting employee forms, calculating gross pay, withholding taxes, paying employer taxes, processing payroll, and keeping accurate records

Step 1: Gather Employee Payroll Forms

Before running payroll, collect the forms and information needed to pay employees correctly, including:

• Form W-4 for federal income tax withholding
• Arizona Form A-4 for Arizona income tax withholding
• Form I-9 to verify employment eligibility
• Direct deposit information, if applicable
• Employee pay rate, pay schedule, classification, and deduction information

Arizona employees generally must complete Form A-4 within five days of hire. If a new employee does not complete Form A-4 within five days, employers must withhold Arizona income tax at 2.0% until the employee chooses a different rate.

Step 2: Calculate Gross Pay

Calculate each employee’s gross pay before taxes and deductions.

For hourly employees, multiply hours worked by the hourly rate and include overtime when required. For salaried employees, divide the annual salary by the number of pay periods.

Include bonuses, commissions, tips, severance, PTO, reimbursements, and other taxable compensation when applicable.

Step 3: Calculate Payroll Taxes

Arizona employers must withhold federal income tax based on Form W-4 and Arizona income tax based on Form A-4.

Employers and employees also pay FICA taxes. Social Security and Medicare apply at the federal level, and employers must also withhold Additional Medicare Tax from employee wages over the federal threshold when applicable.

Arizona unemployment insurance is paid by the employer, not deducted from employee wages. For 2026, Arizona’s taxable wage limit is $8,000, and the new employer rate is 2.00%. Experienced employer rates vary by employer history.

Step 4: Subtract Deductions

After calculating payroll taxes, subtract any required or employee-authorized deductions.

Common deductions include:

• Health insurance premiums
• Retirement plan contributions
• Wage garnishments
• Child support payments
• Union dues
• Other approved employee deductions

Step 5: Pay Employees

After calculating gross pay, taxes, deductions, and net pay, pay employees using an allowed payment method, such as direct deposit, paper check, or another approved method.

Make sure payroll is processed early enough to meet Arizona payday rules and any direct deposit processing deadlines.

Step 6: File Payroll Reports & Make Payments

Arizona employers must remit withheld Arizona income tax and pay Arizona unemployment insurance when applicable. Federal payroll taxes are paid to the IRS, typically through EFTPS.

Arizona withholding deposit schedules vary by employer, so businesses should follow Arizona Department of Revenue withholding guidance and IRS employment tax deadlines.

Step 7: Keep Payroll Records

Keep payroll records organized and secure. Records should include employee names, Social Security numbers, addresses, pay rates, hours worked, pay periods, payment dates, deductions, and tax records.

The IRS generally requires employment tax records to be kept for at least four years. FLSA payroll records should generally be kept for at least three years, while wage calculation records, such as timecards and work schedules, should generally be kept for at least two years.

Arizona State Tax Resources

For official guidance, use the Arizona Department of Revenue for income tax withholding and employer tax guidance. Use the Arizona Department of Economic Security for unemployment insurance and the Arizona Industrial Commission for minimum wage, paid sick time, workers’ compensation, child labor, and workplace law guidance.

For federal payroll rules, use the IRS for federal withholding, FICA, FUTA, and employer tax filing guidance, and the U.S. Department of Labor for FLSA wage, overtime, and recordkeeping requirements.

Looking for more information on payroll taxes? Check out our guide to payroll taxes for small businesses.