If your small business has employees working in Arizona, you’ll need to withhold and pay Arizona income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Arizona state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. Many states issue separate tax ID numbers for withholding tax purposes. Arizona, however, uses the EIN. You can apply for an EIN at the IRS. Generally, if you apply online, you will receive your EIN immediately.
Once you have your EIN, you need to register it with the Arizona Department of Revenue (DOR). You can register either online or on paper (Form JT-1/UC-001, Arizona Joint Tax Application).
All new employees for your business must complete both a federal Form W-4 and the related Arizona Form A-4,Employee’s Arizona Withholding Election. You can download blank Forms A-4 from the withholding forms section of the DOR website. You should keep the completed forms on file at your business.
In Arizona, there are three primary payment schedules for withholding taxes: semi-weekly, monthly, or quarterly. In exceptional cases, there are also one-banking-day and annual schedules. Your business’s payment schedule will depend on the average amount of Arizona income taxes withheld during the preceding four calendar quarters. The basic rule for what payment schedule to use is:
In general, one-banking-day payments are required if federal taxes accumulate to a threshold six-figure dollar amount on any day during a monthly or semi-weekly deposit period. In order to qualify for an annual payment schedule, you must have withheld no more than a relatively low threshold dollar amount for the four preceding calendar quarters.
The exact threshold dollar amounts for the various payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
Arizona law requires that you, the employer, regularly determine whether you can file quarterly or must file more often. Moreover, new businesses (ones that don’t yet have four consecutive calendar quarters of withholding) must use a special withholding payment schedule computation. You can find instructions for this special computation on Form A1-QRT which is available from the withholding forms section of the DOR website. Otherwise, at the beginning of each new financial quarter (January 1, April 1, July 1, October 1), Arizona law requires you to compute your average withholding tax liability for the preceding four quarters.
Due dates for payments are as follows:
If the payment is due on a Saturday, Sunday, or legal holiday, the due date is the next banking day.
If you pay monthly or more frequently, use Form A1-WP to make your payment. If you pay quarterly, use Form A1-QRT. If you pay annually, use Form A1-APR. You can also make your payments online if your register with the DOR for that purpose.
Apart from making scheduled tax payments, businesses making payments on a one-banking-day, semiweekly, or monthly schedule also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. Use Form A1-QRT and complete the appropriate sections for your payment schedule. (Businesses on an annual payment schedule file Form A1-APR, which is not covered here.) You can file the form online if you have registered with the DOR.
Quarterly returns are due on or before the last day of the month following the close of the quarter:
Currently, businesses that have filed every payment on time during the preceding calendar quarter are allowed ten additional days to file the quarterly return. As with tax payments, any return due date that falls on Saturday, Sunday, or a legal holiday is adjusted to the next business day.
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal form W-2 summarizing the employee’s withholding for the year. In most cases, you will use Form A1-R,Arizona Withholding Reconciliation Return. (Businesses on an annual payment schedule use Form A1-APR, Arizona Annual Payment Withholding Tax Return, and will not file Form A1-R.) You should attach copies of the federal W-2s sent to all of your employees working in Arizona. The return is due by the last day of February for the preceding calendar year (except if that day is a Saturday, Sunday, or legal holiday, in which case it is due the next day). You must submit a paper copy of Form A1-R.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business can still be held directly responsible for any mistakes made by an outside payroll company.
This article touches on the basic elements of Arizona employee withholding taxes. Under Arizona law, any person required to collect, account for, and pay withholding tax who fails to do so is personally liable for tax not collected, accounted for, and paid. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.