New Mandatory Changes to Arizona Withholding

Senate Bill 1185 Mandatory Changes to Arizona Withholding 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.

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'sfederal 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.

We hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please contact Art Wilson, CPA here.