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 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.
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.
Other possible exemptions from withholding include:
• Wages paid to non-resident employees of common carriers;
• Wages paid for domestic service in a private home;
• Wages paid for casual labor not in the course of the employer's trade or business.
• Wages paid to part-time or seasonal agricultural employees, except such employees whose principal duties are operating any mechanically-driven device in such operations.
• Wages or salary paid to a nonresident who is in this state on a temporary basis for the purpose of performing disaster recovery;
• Wages paid to a nonresident of this state engaged in any phase of motion picture production.