Withholding Exceptions

An employer must withhold Arizona tax from wages paid for services performed within the state regardless of whether the employee is a resident or nonresident. However, there are exceptions to the general mandatory withholding requirements for nonresident employees temporarily performing services for their employer in Arizona. Although a nonresident employee may be exempt from Arizona income tax withholding, the individual has to file a nonresident Arizona income tax return if he or she meets the filing requirement.

An employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in the state under the following circumstances:

  • The employee is physically present in Arizona for less than 60 days in a calendar year for the purpose of performing a service benefitting the employer; and
  • The employer is an individual, fiduciary, partnership, corporation, or limited liability company having property, payroll, and sales in Arizona; or, a related entity has more than 50% direct or indirect common ownership.

 

Arizona Form A-4 provides an explanation of this exemption (including examples) in the Employer’s Instructions.

 

An employer may also not have to withhold Arizona tax from wages paid to:

  • A Native American who:
    • Lives on the reservation;
    • Works on that reservation; and,
    • Is an affiliated and enrolled member of the tribe for which that reservation was established.
  • A military spouse. The federal Military Spouses Residency Relief Act provides tax relief for qualifying spouses. Under this act, the wages earned by a military spouse are exempt from Arizona income tax withholding. The spouse of an active duty military member who earns wages in Arizona are exempt from Arizona income tax withholding if:
    • The employee’s spouse is a member of the armed forces present in Arizona for compliance with military orders.
    • The employee is present in Arizona solely to be with the spouse.
    • The employee maintains a domicile in another state, which is the same state of domicile as the service member.
  • A nonresident performing services in Arizona if that individual is allowed an income tax credit for taxes paid to his/her state of residence under Arizona Revised Statutes (A.R.S.) § 43-1096. This exemption applies to nonresident employees of:
    • California
    • Indiana
    • Oregon; or
    • Virginia.
  • a nonresident performing services in Arizona if the individual is allowed an income tax credit for taxes paid to his or her state of resident. This exemption applies to nonresident employees who are residents of, or domiciled in, California, Indiana, Oregon or Virginia.

For more information on these exceptions, see Arizona Form WEC.

For additional information on military spouses, see Publication 705.

 

Other possible exemptions from withholding include:

  • wages paid to nonresident employees of common carriers;
  • wages paid for domestic services in a private home;
  • wages paid for casual labor not in the course of the employer’s trade or business;
  • wages paid to part-time or seasonal agricultural employees, except such employees whose principal duties are operating any mechanically-driven device in such operations;
  • wages or salary paid to a nonresident in the state on a temporary basis for the purpose of performing disaster recovery;
  • wages paid to a nonresident of this state engaged in any phase of motion picture production.