Compliance Central

Arizona Senate Bill 1185 revised the withholding tax tables for wages paid after June 30, 2010.

Arizona withholding rates (paid after June 30, 2010) are to be 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. Previously (amounts withheld through June 30, 2010), the tax amount withheld was a percentage of the federal withholding tax.

Employer

An employer must make Arizona Forms A-4 and A-4V available to employees at all times and inform employees of the available Arizona withholding options. An explanation of this exemption (including examples) is included in the Employer’s Instructions for the Arizona Form A-4.

New Employees

New employees must complete revised Form A-4 within the first five days of employment. If the employee does not complete this form, the employer must withhold 2.7% of the employee’s gross taxable wages, until the employer receives a completed form from the employee.

A new employee who is an Arizona resident working outside of Arizona may elect voluntary Arizona income tax withholding for 2010 by completing the revised Arizona Form A-4V. The employer must withhold Arizona income tax from the employee’s compensation at the greater of either the percentage elected by the employee or the minimum percentage of 1.3% for employees with an annual compensation of less than $15,000 or 1.8% for employees with an annual compensation of $15,000 or more.

Current Employees

Current employees must complete revised Form A-4 to elect a different Arizona withholding percentage or to change the additional amount designated to be withheld from each paycheck. If the employee wants to increase or decrease the amount of Arizona withholding, the employee must complete this form to change the Arizona withholding percentage or change the additional amount designated to be withheld each paycheck. To facilitate the transition to the new rates, for existing employees who have not filed a revised Arizona Form A-4, employers may use the following table:

*Rate is only available to employees whose compensation is less than $15,000 annually

Pension and Annuity Recipients

Pensions or annuities paid on or after July 1, 2010, the withholding tax will be a percentage of the taxable amount of the distribution (box 2a of federal Form 1099-R). The percentages for payments made after June 30, 2010 are listed below.

The new rate percentages listed are based on the taxable amount of the distribution.

Exception to Mandatory 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. 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.

Spouse of Servicemember – Military Spouses Residency Relief Act (MSRRA)

Under MSRRA an employer may not have to withhold Arizona tax from wages paid to a nonresident employee who is the spouse of a servicemember.  The employee may claim an exemption from Arizona withholding (Form WECM) 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.