ARIZONA DEPARTMENT OF REVENUE
ARIZONA WITHHOLDING TAX RULING
WTR 93-1
This substantive policy statement is advisory only. A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act. If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under Arizona Revised Statutes § 41-1033 for a review of the statement.
ISSUE:
Are amounts paid for employee benefits considered to be a payment of wages subject to Arizona withholding?
APPLICABLE LAW:
Arizona Revised Statutes (A.R.S.) § 43-102.1 adopts the provisions of the Internal Revenue Code relating to the measurement of adjusted gross income.
A.R.S. § 43-104.13 defines the term "Internal Revenue Code" for Arizona income and withholding tax purposes.
A.R.S. § 43-401.A requires an employer to deduct Arizona withholding from remuneration paid to an employee for services performed in Arizona.
Internal Revenue Code (I.R.C.) § 3401 defines the term "wages" for federal withholding purposes.
I.R.C. § 3402 requires every employer making payment of wages to deduct and withhold upon such wages a tax determined in accordance with prescribed tables or a prescribed mathematical formula.
DISCUSSION:
For federal purposes, I.R.C. § 3402 requires every employer making payment of wages to deduct and withhold upon such wages a tax determined in accordance with prescribed tables or a prescribed mathematical formula. Under I.R.C. § 3401, the term "wages" generally includes all remuneration (other than fees paid to a public official) for services performed by an employee for an employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. Therefore, for federal withholding purposes, employee benefits may be included in wages and subject to federal withholding.
For Arizona withholding tax purposes, the Department of Revenue is frequently asked whether employee benefits are subject to Arizona withholding. The benefits most frequently mentioned are:
1. Employer provided: educational assistance plans, dependent care assistance, insurance, automobile for personal use, non-business air transportation by non-airline employer, vacation facilities, club memberships, tickets to events, use of employer owned or leased property, meals and lodging for the employer's convenience, meals and lodging not for the employer's convenience;
2. Contributions to qualified: I.R.C. §§ 403.B, 457, 401K plans, I.R.C. § 125 cafeteria plans, self employment retirement plans, individual retirement plans;
3. Employer contributions to: non-forfeitable non-qualifying stock option plans, forfeitable non-qualifying stock option plans;
4. Prepaid group legal service plans,
5. Employer reimbursed moving expenses,
6. Group term life insurance,
7. Awards, gifts and prizes over $25 (not for productivity of safety),
8. Interest from below market interest rate loans in excess of $10,000,
9. Excess employee discounts.
Whether any specific benefit is included in wages for withholding purposes is determined under the Internal Revenue Code. For Arizona withholding tax purposes, A.R.S. §§ 43-102 and 43-104.13 conform the Arizona definition of wages to the federal definition of wages. Therefore, unless otherwise provided by Arizona statutes, amounts that are included in wages and are subject to mandatory federal withholding are likewise subject to Arizona withholding.
A.R.S. § 43-401.A requires an employer to withhold from wages paid to any employee for services performed within this state an amount equal to an applicable percentage, stated in A.R.S. § 43-401, of federal income tax which was withheld under the Internal Revenue Code.
RULING:
Arizona statutes do not provide for a specific treatment of amounts paid for employee benefits. Therefore, amounts of such payments which are included in wages and subject to mandatory federal withholding are subject to Arizona withholding. Amounts excluded from mandatory federal withholding are similarly excluded from Arizona withholding.
Harold Scott, Acting Director
Signed March 29, 1993
Explanatory Notice
The purpose of a tax ruling is to provide interpretive guidance
to the general public and to department personnel. A tax ruling
is intended to encompass issues of law which are not adequately
covered in statute, case law or administrative rules. A tax
ruling is a position statement which provides interpretation,
details or supplementary information concerning the application
of the law. Relevant statute, case law, or administrative
rules, as well as a subsequent ruling, may modify or negate any
or all of the provisions of any tax ruling. See GTP 92-1 for
more detailed information regarding documents issued by the
Department of Revenue.