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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.
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 option. Employees may 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 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.
New withholding tax rate FAQs.
No Arizona income tax withholding shall be deducted or retained from:
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 that 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 register and complete the JT-1 application on AZTaxes.gov or complete the form. 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.
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:
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.
Individuals receiving regularly scheduled payments from pensions or annuities that are included in their Arizona gross income may elect to have Arizona income tax withheld from those payments. Employee completes Arizona Form A4-P and submits it to the payer of the annuity or pension to make this election.
NOTE: An employee may use Arizona Form A4-P to elect to have Arizona income tax withheld if they receive regularly scheduled from any of the following:
Employees may NOT elect to have Arizona income tax withheld from the following:
Withholding percentage options.
Rates are a percentage of gross taxable wages
Arizona wages paid to certain individuals are exempt from Arizona income tax withholding. Individuals who qualify for this include:
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.
If the employee is a Native American, their wages are exempt from Arizona income tax withholding if they:
For additional information, see the Department’s ruling, Individual Tax Ruling (ITR) 96-4, Income Taxation of Indians and 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.
If the employee is a nonresident working in Arizona, they may claim an exemption from Arizona income tax withholding if they are:
For additional information, see Arizona Form 309, Credit for Taxes Paid to Another State or Country.
Rules: These can be read online at the Arizona Secretary of State Website.
Statutes: The statutes are available online at the Arizona State Legislature site.