The Complete Guide To Arizona State Taxes & Payroll Taxes
Navigating all of the Arizona state and federal taxes that business owners need to pay can be complicated, but our helpful guide lays it all out for you.
Arizona’s state taxes range from state income taxes to luxury sales taxes. For Arizona business owners, taxes can be challenging to navigate because there are various federal, state, and local taxes to consider, plus business licensing requirements throughout the state.
Fortunately, paying and filing your Arizona business taxes isn’t too complicated once you understand the basics. This guide explains everything you need to know about Arizona state taxes for business, including a deep dive into Arizona’s payroll taxes and how to calculate them.
Table of Contents
Does Arizona Have State Income Tax?
Arizona levies a corporate and individual income tax. Arizona’s income tax rate ranges from 2.59%-4.5% based on the state’s progressive tax method.
Arizona’s corporate income tax rate for the 2021 tax year is 4.9% of a business’s taxable income or $50, whichever is greater.
Federal & State Payroll Taxes In Arizona
Arizona businesses must pay federal, state, and local taxes, including FICA, unemployment insurance, income taxes, sales taxes, use taxes, luxury taxes, and more.
Keep reading for an in-depth look at Arizona’s federal and state payroll taxes.
Arizona Income Tax
Arizona’s personal income tax ranges from 2.59%-4.5%, depending on your income, marital status, and tax-exempt status. Here’s a look at Arizona’s personal income tax brackets based on gross earnings and filing status:
- $0-$26,500: 2.59%
- $26,501-$53,000: 3.34%
- $53,001-$159,000: 4.17%
- $159,001 & Over: 4.5%
- $0-$53,000: 2.59%
- $53,001-$106,000: 3.34%
- $106,001-$318,000: 4.24%
- $318,001 & Over: 4.5%
Sole proprietors must report their income on their individual income tax returns and pay estimated taxes throughout the year if they expect to earn $75,000 or more annually.
Remember that Arizona’s income taxes must be paid in addition to federal income taxes, which range from 10%-37% depending on your tax bracket.
Arizona Corporate Income Taxes
Arizona’s corporate income tax rate is currently set at 4.9% of a business’s taxable income or $50, whichever is greater. Arizona allows individual taxpayers to report small business income on a separate return at a flat 3% tax rate.
Unfortunately, at the time of writing, Arizona has not settled its 2022 tax rates, so it’s unclear whether the Small Business Income Tax (SBI) filing method will save your business money.
Partnerships or businesses doing business in Arizona must file Arizona Form 165 to report income subject to the state’s income taxes.
If your business owed more than $1,000 in income taxes in the previous tax year, you’ll be required to make estimated tax payments. Further, if you anticipate your business owning more than $500 in corporate income tax, you are required to pay electronically or be liable for a 5% penalty to pay your taxes another way.
The Federal Insurance Contributions Act (FICA) established FICA taxes, which fund social security and Medicare programs.
Social security is taxed at 6.2% for both employees and employers, totaling 12.4%. Employers are required to withhold 6.2% of an employee’s gross earnings per pay period and pay their portion of social security taxes.
The Medicare tax is also shared between employers and employees, with each entity owing 1.45% for a total of 2.9%. Any individuals earning $200,000 or more are subject to an additional 0.9% Medicare tax, regardless of filing status.
Unemployment Insurance Tax
Arizona businesses must pay unemployment insurance taxes at the federal and state level. At the federal level, the Federal Unemployment Tax Act or FUTA taxes are set at 6% of the first $7,000 you pay an employee.
At the state level, Arizona uses a reserve ratio system to levy state unemployment insurance tax, starting at 2% for the first two years. After that, your tax rate will change to 0.08%-20.96% depending on the amount of taxes you have paid, how much in employment benefits your business has paid out to former employees, and your average annual taxable payroll size.
Arizona Sales Tax
Arizona does not levy a traditional sales tax, but businesses often adopt the state’s 5.6% Transaction Privilege Tax (TPT) as a sales tax to reduce out-of-pocket expenses. The state’s TPT is a tax on the privilege of doing business in Arizona.
If your business sells products or services that may be subject to Arizona’s TPT tax, you’ll need to apply for a license from the Arizona Department of Revenue (ADOR). You may also be required to apply for local-level business and occupational licenses, depending on the city or town in which your business operates.
Businesses with multiple locations can file for a single consolidated license with all locations represented or may license each location individually.
Your business may be subject to additional taxes at the local level, depending on where your business is located in Arizona and the type of business activity you’re engaged in. You can review ADOR’s TPT and Other Tax Rates Tables for up-to-date county excise and state-level TPT tax rates.
Arizona Use Tax
Arizona’s use tax is set at 5.6% and applies to out-of-state businesses operating in Arizona. Your business is generally considered operating in Arizona if it maintains a physical presence in the state, such as an office location or warehouse.
Arizona Luxury Taxes
Businesses selling, producing, or purchasing luxury goods, such as liquor, beer, tobacco, cigarettes, and cigars, may be required to pay Arizona’s luxury tax. Luxury tax rates depend on the volume or amount, sale price, alcohol content, and whether the item has been manufactured for retail purposes.
The Arizona State Legislature keeps an updated list of luxury goods and tax rates in Arizona. You may review the list to determine whether your business will be subject to luxury goods taxes.
Arizona Property Taxes
Businesses must pay property taxes in Arizona. Businesses must submit a Business Property Statement form obtained from the County Assessor of the county where the business is located. As property taxes vary by location, you’ll need to contact your county’s Assessor’s Office for more details about tax rates and reporting instructions.
Arizona State Tax Exclusions & Exemptions
The Arizona Revised Statutes outline the various tax exemptions for businesses across all sectors. According to the current governing statutes, eligible businesses may be exempt from the following Arizona taxes:
- Property taxes
- TPT taxes
- Municipal taxes
- Use taxes
- Fuel taxes
- Luxury taxes
Contact a tax professional familiar with Arizona’s business tax laws to find out if your business is eligible for one or more of these tax exemptions. Additionally, you may choose to review Arizona’s Revised Statutes on taxation for an in-depth explanation of business tax exemptions in the state.
With regard to payroll taxes, businesses may not withhold Arizona income taxes from wages paid to:
- Nonresident employees of common carriers
- Domestic services in a private home
- Casual labor
- Part-time or seasonal employees whose labor is limited to planting, cultivation, harvesting, or field packing of seasonal agriculture crops (except those whose job is primarily operating mechanical driven devices for such)
- Nonresident employees of out-of-state businesses
- Nonresident employees who are in the state for less than 60 days per calendar year for work
- Nonresidents in the state temporarily performing disaster recovery services after a declared disaster
- Nonresidents engaged in movie productions (provided the employer has filed and been granted tax exemption status)
For more information about payroll tax exemptions in Arizona, check out Arizona’s Withholding Tax page.
Individual taxpayers in Arizona may be eligible to claim tax exemptions if the taxpayer or their spouse is blind or 65+ years old.
Further, individual taxpayers may be eligible for tax exemptions when claiming dependents 65 years or older and not otherwise claimed for a dependent credit.
However, there are very specific requirements regarding medical costs, care costs, the living situation, and more that a taxpayer must meet before claiming this exemption status.
For more information on individual taxpayer exemptions in Arizona, check out Arizona’s Deduction and Exemptions list for individual taxpayers.
Arizona Labor Laws & Other HR Requirements
As an employer in Arizona, your business must adhere to state, federal, and local labor laws and HR requirements, including policies governing minimum wages, PTO, workers’ compensation, child labor, and more.
Keep reading for more information about Arizona’s labor laws and HR requirements.
Arizona Minimum Wage
Arizona’s minimum wage is $12.80 per hour, with annual adjustments based on inflation and cost of living. However, other cities in the state have adopted higher minimum wages, including Tucson’s starting wage of $13 per hour, which is scheduled to increase annually.
Arizona Unemployment Tax
Arizona’s unemployment tax rates range from 0.08%-20.93% of the first $7,000 you pay an employee, depending on your business’s ratio group.
New employers in Arizona are subject to a state-level 2% unemployment insurance tax for their first two years in business.
Once the two years have passed, the unemployment insurance tax will be adjusted depending on the ratio group your business falls under.
Arizona New Hire Reporting
Employers in Arizona are required by federal and state law to report newly hired and re-hired employees to the Arizona New Hire Reporting Center. Hiring reports must be submitted within 20-days of the employee’s hire date.
Arizona Child Labor Laws
Any employee or worker in Arizona who is under the age of 18 is subject to local, state, and federal child labor laws. Arizona’s child labor laws are complex but are generally designed to keep underage employees out of dangerous situations.
Further, Arizona’s labor laws restrict the hours those under the age of 16 are allowed to work. When there is school the next day, employees under 16 may not work before 6:00 AM or after 9:30 PM. This limit extends to 11:00 PM when there is no school the next day.
When school is in session, employees cannot work more than three hours per school day or eight hours on weekends so as not to exceed 18 hours total per work week.
Employees under the age of 16 in Arizona are not allowed to participate in any occupations related to or requiring:
- Manufacturing, processing, or warehousing
- Commercial laundering or dry cleaning
- Activities involving agriculture
- Activities requiring work five feet or more off the ground
Additionally, employees under the age of 16 working in the gasoline or food industries are strictly prohibited from participating in:
- The maintenance and repair of equipment
- Cooking or baking occupations
- The preparation of meat for sale
- The operation of any power-driven food slicers, choppers, cutters, and grinders
Arizona employees under the age of 18 are not allowed to participate in any occupations related to or requiring:
- The production or storage of explosives
- Driving or serving as outside helpers on motor vehicles
- Mining or quarries
- Logging or mills
- Wrecking, ship-breaking, or demolition
- Excavation or tunneling operations
- Exposure to radioactive substances or ionizing radiation
- Manufacturing of silica refractory or clay construction products
- Operating power-driven hoists, forklifts, elevators, cranes, or derricks
- Operating power-driven metal working, forming, punching, or shearing machines
- Operating power-driven machines to slaughter, pack, process, or render meat
- Operating power-driven baking machinery
- Operating power-driven saws
- Operating power-driven woodworking machines
- Operating power-driven paper products machines
Arizona Paid Sick Leave Policy
The Fair Wages and Healthy Families Act states that employees in Arizona may earn and accrue paid sick time at a rate of one hour per 30 hours worked. Employees may accrue up to 24 hours of paid sick time if the business employs fewer than 15 employees or up to 40 hours for businesses with more than 15 employees.
Employers may require newly hired employees to wait until 90 days have passed from their hire date before they can begin accruing paid sick time.
However, employers are free to increase accrual amounts and reduce use limitations, provided they maintain the minimums set by the state.
Arizona Payday Laws
Arizona’s payday laws require employees to be paid two or more days a month, never more than 16 days apart.
If an employee is fired, their final wages must be paid within seven working days or the end of the next regular pay period, whichever occurs first.
If an employee quits, their final wages must be paid out at the next regular payday for the pay period, and they may be paid by mail.
Disability Insurance In Arizona
Arizona does not require disability insurance at the state level and considers it a voluntary employee benefit that new employees can elect to enroll in during the onboarding process or Open Enrollment.
Workers’ Compensation In Arizona
Arizona uses a “no-fault” workers’ compensation program, in which injured employees may receive medical and compensation benefits regardless of who caused the accident.
Arizona employers are required to carry workers’ compensation insurance if they regularly hire employees in their customary business practices, regardless of the type of employee, resident status, or the number of employees you hire.
Arizona Paid Family Leave
Arizona does not have any state-level paid family leave policies, so these rights are only protected under the federal Family and Medical Leave Act (FMLA). This allows employees to take up to 12 weeks of unpaid, job-protected leave to care for sick family members, take medical leave, and manage child placement, childbirth, and newborn care.
Arizona Meal Breaks
No federal or state laws require employers to provide meal or rest breaks. However, federal law dictates that employers offering breaks that are less than 20 minutes must compensate employees for that time.
Paid Jury Duty Leave In Arizona
Arizona residents are compensated for jury duty at $50/day plus $0.625 per mile from their home for travel expenses. Employers are not required to pay employees for time spent serving jury duty.
Arizona Equal Opportunity Employment Laws
Arizona has passed laws at the state level to protect employees and job applicants from employment discrimination. Arizona’s employment discrimination laws make it illegal for employers, labor organizations, job training programs, and other employment entities to discriminate against applicants, employees, or workers based on:
- National origin
These laws hold, except in cases where age, sex, or religious qualifications are a bona fide requirement of the job. Age discrimination protection is only extended to those 40 years or older.
Employers may also be required to adhere to additional employment discrimination prevention laws at the local level, including discrimination on the basis of sexual orientation or pregnancy status.
How To Calculate Payroll Taxes In Arizona
Now that you have a good grasp of payroll taxes and HR requirements in Arizona, you’re ready to make your first payroll run and take a crack at calculating payroll taxes.
Here’s a step-by-step breakdown of everything you need to know about how to calculate payroll taxes in Arizona and run payroll for your business.
Step 1: Prepare To Run Payroll
In preparation for your first payroll run, you’ll need to ensure that you have onboarded all your employees properly, including having filled out up-to-date I-9s and W-4s. Additionally, you’ll need to gather information about employee pay rates, pay schedules, whether employees are hourly or salaried, and employee payment methods preferences.
In addition to having this information, you’ll need to ensure that you have a list of payroll taxes that you’re responsible for withholding and paying to the federal government, the state of Arizona, and locally. Arizona’s payroll taxes include:
- FICA taxes
- FUTA taxes
- Unemployment insurance taxes
- Arizona income taxes
- Federal income taxes
- Local taxes
Step 2: Calculate Employees’ Gross Earnings
An employee’s gross earnings are the wages they have earned before taxes are taken out. You’ll need to calculate gross earnings because taxes are based on employees’ pre-tax earnings.
To calculate gross earnings for a salaried employee, divide their yearly salary by the number of pay periods per year.
For example, let’s consider a salaried employee earning $60,000 annually, paid out on a semi-monthly basis (24 pay periods per year). In this example, you would divide $60,000 by 24 with the employee’s gross earnings set at $2,500 per pay period.
To calculate the gross earnings for an hourly worker, multiply the hours they worked during the pay period by their hourly wage. For example, an employee earning $19 per hour working 80 hours per pay period would total $1520 in gross earnings.
You’ll also need to include supplemental earnings when calculating an employee’s gross earnings. Supplemental wages include:
- Overtime pay
- Commissions, bonuses, and prizes
- Back or retroactive pay
- Severance pay
Step 3: Calculate Payroll Taxes
To calculate payroll taxes, multiply your employee’s gross earnings by each individual tax rate.
You’ll need to express each tax rate as a decimal, so start by dividing the tax rate by 100. For example, the 6.2% social security tax would be 0.062 as a decimal.
Once you have your tax rates expressed as decimals, you can use the following payroll tax formula to calculate payroll taxes:
- (Gross Earnings) X (Tax Rate) = Payroll Taxes Owed
If you are not using payroll software, you will need to calculate each payroll tax individually per employee. At a minimum, you’ll need to calculate six different payroll taxes per employee, not including local payroll taxes. Payroll software can automatically calculate and withhold payroll taxes for your employees, saving your business time, energy, and potentially, money spent on tax penalties due to incorrect calculations.
Step 4: Withhold & Pay Payroll Taxes
Once you’ve calculated payroll tax withholdings for each employee and your payroll tax liabilities, you can begin the process of withholding and paying payroll taxes.
Employers are responsible for withholding the following taxes from employee paychecks:
- Social security taxes
- Medicare taxes
- Income taxes (federal, state, and local, as applicable)
- Any additional local level taxes
Employers are also responsible for paying the following payroll taxes out of pocket:
- Social security taxes
- Medicare taxes
- FUTA taxes
- State unemployment insurance tax
- Any additional local payroll taxes
Employers are required to remit payroll taxes to the state of Arizona and the federal government on an annual, quarterly, monthly, semiweekly, or next-day basis depending on the amount of income tax withheld, size of the business, and the business type.
Step 5: Make Deductions
Beyond taxes, employers must handle all employee payroll deductions, including 401(k) contributions, health insurance premiums, life insurance premiums, union fees, work expenses, child support, alimony payments, and other wage garnishments.
Step 6: Run Payroll
Once you’ve sorted taxes and deductions, you’re ready to run payroll for your business.
You can cut checks or pay your employees via direct deposit. Just be sure you’ve completed your payroll run before any direct deposit or check printing service deadlines to ensure that your employees get paid on time.
You’ll want to keep detailed records of payroll runs for your business’s bookkeeping, so be sure to record all payments in your general ledger.
If you’ve completed your first DIY payroll run for your business, you’re now aware that the process can be both time-consuming and tedious. Moreover, as there are significant tax implications to consider when running payroll, it’s not a duty to be taken lightly.
That’s why it may be best to automate your business’s payroll processing with payroll software. With built-in payroll tax support, automatic calculations, auto-scheduled payroll runs, and time-tracking solutions, payroll software makes running payroll easy because it’s designed to handle the bulk of the work for you.
If you’re considering adopting payroll software for your business, check out our guide to the best payroll software options. We take a deep dive into payroll software pricing, features, security, and more to help you make an informed decision when choosing the right payroll software for your business.
Arizona State Tax Resources
Taxes are tedious and complicated everywhere; Arizona taxes are no exception. Fortunately, it’s not too challenging to get a basic understanding of taxes in Arizona, plus there are plenty of resources available to help you on your Arizona tax journey, regardless of where you’re starting.
Not yet in business? Check out our guide to small business loans in Arizona for an in-depth exploration of funding options for your new business in the Grand Canyon State.
Looking for more information on payroll taxes? Check out our guide to payroll taxes for small businesses. This guide gets into the minutiae of payroll taxes for small businesses, including tax form identification, calculation methods, payment deadlines, payroll tax penalties, and much more.