Arizona Withholding Tax

Information for Employers

An employer must withhold Arizona income tax from employees whose compensation is for services performed within Arizona. Arizona state income tax withholding is a percentage of the employee’s gross taxable wages.

Gross taxable wages refers to the amount that meets the federal definition of wages contained in U.S. Code § 3401. Generally, this is the amount included in box 1 of the employee’s federal Form W-2. Amounts considered to be wages for federal tax purposes are considered to be wages for Arizona income tax purposes. Amounts included in wages and subject to mandatory federal withholding are subject to mandatory Arizona withholding. Amounts excluded from wages and from mandatory federal withholding are excluded from mandatory Arizona withholding.

Refer to: Employer Withholding Filing Obligations for additional information on withholding Arizona income tax.

 

Employee Withholding Determination

The Department will follow the determination of the IRS regarding a worker’s employment status as an employee or as an independent contractor. Refer to Arizona Withholding Tax Ruling (WTR) 16-4 to determine if a worker is an employee or an independent contractor for Arizona withholding tax purposes.

Electing an Arizona Withholding Percentage – Completing Arizona Form A‑4

To compute the amount of tax to withhold from compensation paid to employees for services performed in Arizona, all new employees subject to Arizona income tax withholding must complete Arizona Form A-4, Arizona Withholding Percentage Election within five days of employment. If the new employee fails to complete Arizona Form A-4 within 5 days of hire, the employer must withhold Arizona income tax at the rate of 2.0% until the employee elects a different withholding rate. 

To change the amount of Arizona income tax withheld, an employee must complete Arizona Form A-4 and submit to his or her employer to choose a different withholding percentage. Employees may also request to have an additional amount withheld by their employer.

Existing employees may change their withholding amount by completing Arizona Form A-4 to change their previous withholding amount or percentage and provide it to the employer.  

Employees who expect no Arizona income tax liability for the calendar year may claim an exemption from Arizona income tax withholding. Employees claiming to be exempt from Arizona income tax withholding, complete Arizona Form A-4 to elect to have an Arizona withholding percentage of zero and provide it to the employer. This exemption must be renewed annually.

 

Employment Excluded From Withholding

No Arizona income tax withholding shall be deducted or retained from:

  • Wages or salary paid to a nonresident employee of a common carrier.
  • Wages paid for domestic service 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 employees whose service to the employer consist solely of labor in connection with the planting, cultivating, harvesting or field packing of seasonal agricultural crops, except such employees whose principal duties are operating any mechanically-driven device in such operations.
  • Wages or salary paid to a nonresident of this state who is:
    • An employee of an individual, fiduciary, partnership, corporation or limited liability company having property, payroll and sales in this state, or of a related entity having more than 50% direct or indirect common ownership.
    • Physically present in this state for less than sixty days in a calendar year for the purpose of performing a service that will benefit the employer or related entity.  For purposes of determining the number of days of service in this state, days spent in the following activities are not included:
      • In transit.
      • Engaging in personal activities.
      • Participating in training or professional development activities or attending meetings that are not directly connected to the Arizona operations of the employer of related entity.
  • Wages or salary paid to a nonresident who is in this state on a temporary basis for the purpose of performing disaster recovery from a declared disaster period.
  • Wages or salary paid to a nonresident engaged in any phase of motion picture production when the employer has applied to the Department for an exemption to the withholding provisions and the Department has determined that the nonresident would be allowed a credit for taxes paid to another state or country against the Arizona taxes imposed on the income earned in Arizona. 

 

NOTE:

  • A nonresident employee may elect to have Arizona income tax withholding deducted in the manner prescribed by section 43-401, subsection E and the employer shall withhold tax pursuant to that election.
  • The employer may elect to withhold tax from the nonresident employee before the sixty-day limitation has elapsed.
  • Wages and salary paid to a nonresident employee who is in this state solely for athletic or entertainment purposes are not exempt from Arizona income tax withholding.

 

Employee or Employer Out-of-State Withholding (Remote Worker)

Arizona Resident Employee Working for Out-of-State Business, Living in Arizona

Withholding of Arizona state income tax from the commencement of employment is required for any resident employee physically working in the state of Arizona regardless of where the employer is based.  

Arizona Residents Employed Outside of Arizona

Arizona residents who are working outside of Arizona may request their employer withhold Arizona income taxes from their wages for work done outside of Arizona.  If the out-of-state employer agrees to withhold Arizona income taxes from the employee's out-of-state wages, the employee will complete Arizona Form A-4V and submit it to the employer.  The amount withheld is applied to the employee's Arizona income tax due when they file the Arizona income tax return.

Out-of-State Employee Working In Arizona

If the employee working in Arizona is not an Arizona resident, withholding of Arizona state income tax is required once the employee has been working in Arizona for 60 days. If both the employer and nonresident employee agree, withholding can start at the beginning of employment instead of waiting 60 days.

To register for both an income tax withholding account with the Department of Revenue and an unemployment insurance account with the Department of Economic Security, the employer will need to complete the JT-1 application on AZTaxes.gov or complete the form and return the completed form to the department. The employee should complete Form A-4 electing their withholding percentage and return it to the employer.

Out-of-State Resident Working for an Arizona Business

Arizona law requires every employer to withhold Arizona income tax from those employees for services provided within Arizona. If an Arizona-based business hires an employee living in another state full-time or is no longer an Arizona resident, the employer is not required to withhold Arizona income tax from the employee's compensation because they are working in another state. 

 

Employees Requesting Reduced Withholding to Designate for Tax Credits

An employee may request that his or her employer reduce the Arizona income tax withheld from his or her wages by the amount the employee wishes to contribute to the following organizations:

  • Contributions to qualifying charitable organizations claimed on Arizona Form 321,
  • Contributions made or fees paid to public schools claimed on Arizona Form 322,
  • Contributions made to private school tuition organizations claimed on Arizona Form 323,
  • Contributions made to certified school tuition organizations claimed on Arizona Form 348, or
  • Contributions to qualifying foster care charitable organizations claimed on Arizona Form 352.

 

Employees must complete Arizona Form A-4C and provide it to the employer.  Keep a copy for their records. 

If the employer agrees to this request, the employer will reduce the employee's Arizona income tax withholding by the amount they designate, and will forward that amount to the charity they indicated.   

 

Withholding on Pension and Annuity Payments and on
Retirement Distributions

Individuals may withhold Arizona income tax be withheld on their payments from a pension, annuity, or a distribution from a retirement account. The individual must complete Arizona Form A-4P and provide the completed form to the payor of their pension, annuity, or to their retirement account administrator. NOTE: Individuals may request to have Arizona income tax withheld from their pension, annuity payment or retirement distribution only to the extent that payment or distribution is includable in their Arizona gross income.

Individuals may not request to have Arizona income tax withheld from the payment of any pension, annuity, or retirement distribution that is not includable in their Arizona gross income, such as a Roth IRA.

Duration of Voluntary Arizona Withholding Election

The payor of the individual’s pension or annuity, or the retirement account administrator will withhold Arizona income tax from their payments until the individual notifies the payor or administrator to change or terminate Arizona income tax withholding.

How to Terminate a Voluntary Arizona Withholding Election

To terminate the voluntary Arizona withholding election, the individual must provide their payor or account administrator with an updated Arizona Form A-4P indicating their wish to terminate voluntary Arizona withholding.

Statement of Arizona Income Tax Withheld

The payor of the individual’s pension or annuity or retirement account administrator will provide that person with a statement indicating the total amount or pension or annuity payments or retirement account distributions and the total amount of Arizona income tax withheld for the year. The statement from the payor or account administrator will be mailed to the individual early in the following year.

 

Withholding Percentage Options

Rates are a percentage of gross taxable wages.

Percentage rate

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

 

Employee Withholding Exemption Certificate

Arizona wages paid to certain individuals are exempt from Arizona income tax withholding. Individuals who qualify for this include:

  • Native Americans,
  • Military Spouses, or
  • Nonresidents.

 

See the discussion below for details. If the employee believe they are an individual who is exempt from Arizona income tax withholding, they must complete Arizona Form WEC, Withholding Exemption Certificate, and provide it to the employer and keep a copy for their records. 

 

Native Americans

If the employee is a Native American, their wages are exempt from Arizona income tax withholding if they:

  • Live on the reservation,
  • Work on that reservation, AND
  • Are an affiliated and enrolled member of the tribe for which that reservation was established.

 

For additional information, see the Department’s ruling, Individual Tax Ruling (ITR) 96-4, Income Taxation of Indians and Spouses. 

 

Military Spouses

The federal Military Spouses Residency Relief Act provides tax relief for qualifying spouses of military personnel. Under this act, wages earned in Arizona by a qualifying spouse are not deemed to be income for work performed in Arizona. Those wages are exempt from Arizona income tax withholding. 

 

Nonresidents

If the employee is a nonresident working in Arizona, they may claim an exemption from Arizona income tax withholding if they are: 

  • A resident of one of the following states: California, Indiana, Oregon, or Virginia, AND
  • Allowed to claim a tax credit against the Arizona tax for taxes paid to the state of residence on Arizona Form 140NR filed for the year.

 

For additional information, see Arizona Form 309, Credit for Taxes Paid to Another State or Country. 

 

Arizona Withholding Rules & Statutes

Rules: These can be read online at the Arizona Secretary of State Website.

  • A.A.C. R15-2b-101 Payment Schedule; Rates; Election by Employee
  • A.A.C. R15-2B-102 Employment Excluded From Withholding

 

Statutes: The statutes are available online at the Arizona State Legislature site.

  • A.R.S. § 43-401 Withholding tax; rates; election by employee
  • A.R.S. § 43-402 Definition of “employer”
  • A.R.S. § 43-403 Employment excluded from withholding
  • A.R.S. § 43-404 Extension of withholding to military retirement pensions and to other annuities; definition
  • A.R.S. § 43-405 Extension of withholding to gambling winnings
  • A.R.S. § 43-406 Extension of withholding to premature withdrawals of state and local government contributions
  • A.R.S. § 43-407 Extension of withholding to unemployment compensation payments
  • A.R.S. § 43-408 Voluntary withholding on out-of-state wages
  • A.R.S. § 43-411 Employer entitled to address of employee
  • A.R.S. § 43-412 Returns of withholding to be filed with department
  • A.R.S. § 43-413 Statement of withholding to employees
  • A.R.S. § 43-414 Liability for failure to withhold
  • A.R.S. § 43-415 Withholding as trust fund for state
  • A.R.S. § 43-416 Failure to remit withholding; classification
  • A.R.S. § 43-417 Withholding without resort to legal action
  • A.R.S. § 43-431 Amounts withheld considered part payment of tax
  • A.R.S. § 43-432 Refund for excess withholding
  • A.R.S. § 43-434 Exemption in case of nonresident employees
  • A.R.S. § 43-433 Remedies for withheld taxes
  • A.R.S. § 43-435 Failure to collect and pay over tax; personal liability