Understanding Payroll Taxes: A Simple Guide for Arizona Business Owners

Susan Hagen
Sep 17
4 min read

Arizona Payroll Taxes at a Glance

Whether you run a small café in Scottsdale or an established firm in Tucson, payroll taxes are an unavoidable part of doing business in Arizona. This guide breaks down the basics—so you can spend less time worrying about compliance, and more time focusing on your business.

Arizona State Income Tax Withholding

Arizona’s payroll tax system is built on a flat tax structure, which means most employees have a standard percentage withheld from their paychecks regardless of what they earn. As of now, the statewide income tax withholding rate is 2.5% for most employees. This flat rate system keeps things simple—no complex brackets or varying percentages to juggle!

One standout feature in Arizona: Employees actually have a say in how much gets withheld. When a new hire joins your team, they must fill out Arizona’s Form A-4 within their first five days of employment. This lets them choose a withholding rate as low as 0.5% or up to 3.5%. If the employee fails to submit their Form A-4, as an employer you’ll need to default to a 2.0% withholding rate until you receive their completed paperwork.

Quick Tips:

Make sure every new employee completes Form A-4 right away.
Keep all A-4 forms on file if the Arizona Department of Revenue requests them.
If confused about withholding rates, the state’s handy Withholding Tax Guide is a clear reference.

Unemployment Insurance: What Arizona Employers Need to Know

In addition to income tax withholding, your payroll responsibilities include handling Arizona’s Unemployment Insurance (UI) tax. Here’s the good news: Unlike income tax, employees don’t pay this tax—only employers do.

The UI tax funds the state program that provides temporary financial support to workers who’ve lost their jobs through no fault of their own. Arizona’s Department of Economic Security oversees this program, and rates are recalculated each year based on the employer’s history and the current economic climate.

You’ll need two important numbers:

Your Federal Employer Identification Number (EIN) (get this from the IRS)
Your unique Arizona UI Account Number (assigned by the Department of Economic Security when you register as an employer)

Don’t forget:

File wage reports and pay UI taxes quarterly, even if you had no payroll during the quarter.
Keep correspondence from both the Department of Economic Security (for UI) and the Department of Revenue (for withholding) organized and up to date.

Federal vs. Arizona Payroll Tax: Double the Details

It’s easy to get payroll taxes confused because you’re managing both state and federal obligations:

Federal payroll taxes include:

Withholding for federal income tax
Social Security
Medicare
Federal Unemployment Tax Act (FUTA)

Arizona state payroll taxes include:

State income tax withholding (with rates chosen via Form A-4)
State unemployment insurance (employer-only responsibility)

You’ll use your EIN for both federal and state reporting, but also your dedicated Arizona UI number for state unemployment. Filing and payment schedules will differ—be sure to match forms and deadlines to the correct agency!

Key Arizona Agencies:

Arizona Department of Revenue: Handles income tax withholding
Arizona Department of Economic Security: Administers unemployment insurance

Payroll Tax Rates and Calculations: Keep It Simple

Arizona Income Tax Withholding:

Employees select a flat percentage (from 0.5% to 3.5%) with 2.5% as the standard rate.
If no form is received, withhold 2.0% until properly updated.

Unemployment Insurance (UI):

New employers start with a standard UI rate set by the state. Over time, your rate will be recalculated based on your claims history and business type.
Only wages up to the wage base set each year are taxable for UI.

Corporate and Entity-Specific Taxes:

C Corporations: Arizona imposes a 4.9% corporate income tax on taxable income.
Pass-Through Entities (PTEs): Eligible businesses can choose to pay an entity-level tax at the flat 2.5% individual rate, potentially reducing the pinch from federal SALT deduction limits.

Paperwork and Forms: Don’t Get Caught Off Guard

Running payroll means running a tight ship on paperwork! Here’s a quick overview to make sure nothing slips through the cracks:

Must-Have Payroll Forms:

Arizona Form A-4: Completed by every employee, kept on file for at least 4 years
AZ Withholding Tax Returns and Reports: File quarterly or annually with the Arizona Department of Revenue
Unemployment Wage Reports: Filed quarterly (even with no payroll) to Arizona DES
Federal and State W-2s: Provide to both employees and appropriate tax agencies annually

Filing Reminders:

Most filings can be done online, which the state encourages for accuracy and timely submission.
Track all filings and correspondence—audits and compliance requests tend to pop up when least convenient.

Record-Keeping: Your Superpower Against Penalties

Solid record-keeping is essential for every Arizona employer. State law requires businesses to keep all payroll, withholding, and unemployment records for at least four years. That includes:

Payroll registers
Employee withholding forms and changes
Tax deposit receipts and confirmation numbers
UI wage reports and rate notices

A cloud-based payroll or bookkeeping system can make storage, search, and retrieval much easier (and your accountant will thank you!).

Payroll Pitfalls to Avoid

Missing new hire paperwork: Always get the A-4 form ASAP
Withholding the wrong percentage: Default to 2.0% until the employee chooses, update promptly
Late/unfiled UI wage reports: Even a “no payroll” quarter must be reported
Poor records: Keep everything for four years—IRS and the Department of Revenue can both audit you

Need Help with Arizona Payroll Taxes?

Don’t let payroll taxes become a headache or risk for your business. At Your Business Accountant, we specialize in helping Arizona businesses set up, manage, and perfect their payroll tax systems—plus tackle filings, questions, and audits.

Ready to save time and reduce stress? Contact us today or check out our Monthly Bookkeeping and QuickBooks Online Training services to streamline your payroll process!

Keeping payroll taxes simple and stress-free—that’s what we’re here for.

(928) 487-5588