Payroll Service Company Legislation -- Updated 8/19/2010

New statutes have been enacted that affect persons and organizations that provide payroll services to Arizona employers. The new statutes, 43-418 and 43-419, establish new requirements for these service providers and penalties for non-compliance. For purposes of the new statutes, a payroll service company is defined as a person or company who 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. Those who meet this definition shall:

Electronically register with the Department of Revenue. This registration is in addition to any other business registration required by the Department.
Make payments electronically and file returns electronically with the Department.
Provide an electronic list of clients to the Department and update it 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 client’s monies, held for payment of 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 payments required under its contract with its client.

There are penalties for non-compliance. 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.

Additional information is available in our FAQ’s for these new statutes and we will be updating this page of the website as further developments warrant.

Senate Bill 1185 Employer Information

Mandatory Changes to Arizona Withholding

Revised for wages paid after June 30, 2010.

Senate Bill 1185 (Laws 2009, 1st Reg. Session, Chapter 2) amended the amounts required to be withheld for Arizona withholding purposes. Through June 30, 2010, the amount required to be withheld was a percentage of federal withholding. For amounts withheld on or after July 1, 2010, the amount required to be withheld will no longer be a percentage of federal withholding. Amounts withheld on or after July 1, 2010, must be based on a table prescribed by the department.

The department has prescribed a withholding table based on a percentage of gross taxable wages. "Gross taxable wages" is the amount that meets the federal definition of "wages" contained in IRC § 3401 and that will be included in box 1 of the employee's federal Form W-2 at the end of the calendar year (i.e. gross wages net of pretax deductions, such as the employee's portion of health insurance premiums).

Employees subject to Arizona income tax withholding must fill out a new form that will go into effect on July 1, 2010, and give the completed form to their employer.

Resident employees working in Arizona and nonresident employees subject to Arizona income tax withholding should complete a revised Arizona Form A-4 and give the completed form to their employer.

Resident employees working outside Arizona and already subject to Arizona withholding, should complete a revised Arizona Form A-4V and give the completed form to their employer.

People receiving annuity or pension payments and already subject to Arizona withholding, should complete a revised Arizona Form A-4P and send the completed form to the payor of the annuity or pension.

To ease the transition, the department has included examples on each form to assist employees in making a new election. To assist with the selection of the proper percentage, the department is also providing interactive forms that will "do the math" for the employee.

You may find all of the revised forms on the Withholding Forms page.

Questions and answers related to SB1185 are available for Employers here and Employees here.

The press release related to SB 1185 is available here.

Arizona Withholding Tax Basics

For Arizona purposes, an employer must withhold Arizona income tax from the payment of wages to an employee whose compensation is for services performed in Arizona.

Arizona income tax withholding is a percentage of the employee's gross taxable wages.

"Gross taxable wages" is the amount that meets the federal definition of "wages" contained in IRC § 3401 and that will be included in box 1 of the employee's federal Form W-2 at the end of the calendar year (i.e. gross wages net of pretax deductions, such as the employee's portion of health insurance premiums). Employees may also have their employer withhold an additional amount.

The employee completes Arizona Form A-4, Employee’s Arizona Withholding Percentage Election, to elect an Arizona withholding percentage. Amounts that are considered wages for federal tax purposes are also considered wages for Arizona income tax and withholding purposes.

Amounts that are included in wages and are subject to mandatory federal withholding are subject to mandatory Arizona withholding. Amounts that are excluded from wages and are excluded from mandatory federal withholding are excluded from mandatory Arizona withholding.

An employer must withhold Arizona tax from wages paid for services performed within Arizona regardless of whether the employee is a resident or nonresident of Arizona. However, there are two exceptions to the general mandatory withholding requirements for nonresident employees temporarily performing services for their employer in Arizona. Although a nonresident employee may be exempt from Arizona income tax withholding, the employee may be required to file a nonresident Arizona income tax return if the employee meets the filing requirement.

An employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in Arizona if:

The employee is physically present in Arizona for less than 60 days in a calendar year for the purpose of performing a service that will benefit the employer; AND
The employer is an individual, fiduciary, partnership, corporation or limited liability company having property, payroll and sales in Arizona, or of a related entity having more than 50% direct or indirect common ownership.

An explanation of this exemption (including examples) is included in the Employer’s Instructions for the Arizona Form A-4.

Additionally, an employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in Arizona if the individual would be allowed an income tax credit for taxes paid to his or her state of residence under A.R.S. § 43-1096. This exemption applies to nonresident employees who are residents of, or domiciled in, California, Indiana, Oregon, or Virginia.

For more information, see Arizona Form WEC.

Additionally, an employer may not have to withhold Arizona tax from wages paid to a nonresident employee who is the spouse of a servicemember. This employee may claim an exemption from Arizona withholding on wages because: (i) the employee's spouse is a member of the armed forces present in Arizona in compliance with military orders; (ii) the employee is present in Arizona solely to be with their spouse; and (iii) the employee maintains a domicile in another state, which is the same state that is the domicile of the servicemember.

For more information, see Arizona Form WECM and Arizona Publication 705.

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 statues 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

Resources

For more in depth information about Arizona withholding tax, see the following withholding Frequently Asked Questions, tax rulings, brochure and forms.

Payroll Service Company Legislation -- Updated 8/19/2010

Arizona Withholding Tax Basics

Arizona Withholding Rules & Statutes

Resources

Online Services