How to Calculate Payroll Taxes in Arizona

Both the employer and employee have payroll tax obligations.

The Arizona Department of Revenue requires Arizona employers to withhold state income tax from employees' paychecks. Arizona's Department of Economic Security requires the employer alone to pay state unemployment (SUTA) tax, and if applicable, state job training tax. The process for calculating SUTA and job training taxes are similar, but the tax rates vary. To determine state income tax withholding, the employer follows the state revenue agency's guidelines.

Instructions

1. Calculate federal income tax to determine state income tax withholding. Arizona state income tax withholding is based on a percentage of federal income tax withholding. Check line three of the employee's federal withholding form--W-4--for her filing status, and line five for her allowances. Consult IRS Circular E for the withholding tax table relevant to the employee's filing status, allowances, pay period and income to figure federal income tax withholding.

2. Obtain the employee's elected state income tax percentage from his Employee's Arizona Withholding Percentage Election form--A-4. Employees complete one form that is effective for wages paid after Dec. 31, 2009 through June 30, 2010. Thereafter, they complete a new form showing a new percentage for wages paid after June 30, 2010. The employee states the precise percentage of tax to withhold based on federal income tax withholding.

3. Multiply the employee's elected tax percentage by the federal income tax withholding amount to arrive at the state income tax withholding amount.

4. Withhold the minimum withholding percentage if the employee fails to submit an A-4 form. For 2010, the minimum withholding rate was 10.7 percent for annual wages less than $15,000; for wages more than $15,000, the minimum withholding rate is 20.3 percent.

5. Do not withhold Arizona income tax if the employee claims exempt on his A-4 form. The employee is exempt if he owed no Arizona income tax in the previous year and does not anticipate owing any for the current year.

6. Calculate state unemployment tax according to your SUTA tax rate and the annual wage base. The department sends employers their tax rate each year. For 2010, the average rate was 2.08 percent. The annual wage limit is the first $7,000 paid to each employee.

7. Figure job training tax, if applicable. Some employers, such as new employers who have a new employer tax rate, are exempt from this tax. The 2010 job training tax rate was .1 percent of the first $7,000 paid to each employee.

Tips & Warnings

• Most employers are required to pay and report state unemployment and job training tax quarterly to the Arizona Department of Economic Security. Employers report and pay state income tax withholding to the Arizona Department of Revenue.

References

• IRS: 2010 Circular E
• Arizona Department of Revenue: Form A-4
• Arizona Department of Revenue: A Guide to Taxes for Arizona Businesses
• Arizona Department of Economic Security: Paying Unemployment and Job Training Taxes
• Arizona Department of Economic Security: Unemployment Insurance Tax Rates
• Arizona Department of Economic Security: Arizona Job Training Tax

Resources

• IRS: Form W-4