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AZ.gov Arizona's Official Web Site
State of Arizona
Department of Revenue
Setting the Standard for Tax Services
 

Payroll Service Companies Frequently Asked Questions

What Arizona law established new requirements and penalties for non-compliance?

Arizona Revised Statute §§ 43-418 and 43-419.

What is a Payroll Service Company?

A payroll service company is a person or organization, defined in ARS § 43-418(E)(3), that has custody or control over a client’s monies for the purpose of paying the withheld taxes and filing returns of a client with the Department of Revenue.

What is a "client" for purposes of this new law?

A client means another employer for whom the payroll service company provides payroll services for a fee, as defined in ARS § 43-418(E)(1).

I only prepare returns for my client and then give them to the client to file and pay. Do I have to register as a payroll service company?

No. If your clients file and pay their own returns, you are not a payroll service company as defined by the statute and do not have to register with the Department of Revenue.

What do I have to do to comply with the new law?

In order to be in compliance with the new law, a payroll service company must:

  • Electronically register with the Department of Revenue.
  • Make payments electronically and file returns electronically with the Department of Revenue.
  • Provide an electronic list of clients to the Department of Revenue and update it by the first of every month.
  • Be authorized in writing by the client to act on behalf of the client with respect to withholding taxes.
  • Keep clients monies, held for payment of state withholding tax or other obligations, in an account separate from the payroll service company’s own funds.
  • Timely file all returns and timely make all withholding tax payments required under its contract with its clients.

I am already registered for Arizona withholding. Do I have to register again as a payroll service company?

Yes, if you meet the definition of a payroll service company for purposes of the new statute.

I am already registered to file and pay my client's taxes on AZTaxes.gov. Do I have to register as a payroll service company?

Yes. This registration is in addition to any other business registration required by the Department. However, you may continue to file and pay electronically through your existing login on aztaxes.gov, and you will not be subject to the penalty.

What needs to be on the client list?

The client list shall include at least the name, address, tax identification number (the client's employer identification number or EIN) and federal deposit frequency of each client.  The client's address must be the actual address of the client and not of the payroll service company.

Can the payroll service company terminate their registration with the Department of Revenue?

Yes, you can terminate your registration by sending your written request to:
Attn:  Signature Card Processing
Arizona Department of Revenue
1600 W. Monroe
Phoenix, AZ  85007-2650

Are there penalties for non-compliance with the new statute?

Yes. Failure to file a return electronically will result in a $25 penalty to the payroll service company.  Failure to pay electronically will result in a penalty of $25 to the payroll service company.  Multiple $25 penalties could apply to the same client on one return.  For example, if Client A is required to make four payments in the 3rd quarter, and none of the payments are made electronically, the payroll service company would be subject to four $25 penalties, a total of $100. If the payroll service company files the quarterly reconciliation for Client A by paper, an additional penalty of $25 would apply for a grand total of $125 in penalties assessed toward the payroll service company related to Client A.

Could the penalties be abated?

Yes, if the failure is due to reasonable cause and not willful neglect.  Written request must be in writing and include company name, tax identification number, period(s) requested for abatement and explanation for late file or late pay. 

Send request to:
Arizona Department of Revenue
Penalty Review Unit
1600 W. Monroe
Phoenix, AZ  85007

Do I Have to Upload a Full Client List Each Month?

Subsequent to the initial list being sent, only additions and deletions need to be sent to ADOR each month.

If payroll service company already submits payments via the EFT ACH Credit process, do they still need to register?

Yes.  You can continue using EFT ACH Credit process to submit payments but you must register and use one of the two electronic services to submit the quarterly or annual returns.

When ADOR is reading a file from a payroll service company, does it read the entire file before returning error codes?

Basic edit checks, such as the file format, are performed on the file before it is uploaded.  If an error is detected the entire file will be rejected.

Once a file is uploaded and an error is detected on a record, the specific record will have to be resubmitted, not the entire file.

Error codes are provided in both the registration/web upload guide as well as the AZFSET guide.

Are "specs" and "AZFSET Implementation Guide" the same?

Yes.

When will the new penalty be imposed?

For quarterly filers, the penalty will be imposed beginning with the 2nd quarter 2012 payments and returns. For annual filers, the penalty will be imposed beginning with the annual 2012 return and payment due February 28, 2013.