Operational Gaze:
How to Run Payroll in Arizona?

April 12th 2024

Every business that employs workers needs to process and manage payroll. It’s part of an employer’s job. But let’s be clear: managing payroll involves more than just cutting checks. It requires a deep understanding of both state-specific and federal legal and tax requirements. Arizona, in particular, has some unique requirements that can be challenging to navigate. From minimum wage regulations to tax obligations and employment laws, there’s a lot to consider when it comes to running payroll in the Grand Canyon State. 

In this guide, we’ll simplify the payroll process for you, breaking down crucial steps and highlighting key considerations. Whether you’re a seasoned entrepreneur or a new business owner, our comprehensive walkthrough will empower you to navigate the intricacies of payroll processing, ensuring your employees are compensated accurately and in accordance with the law.

This Article Covers

Laws That Affect Payroll Procedures in Arizona
Worker Classifications in Arizona

Payroll Forms and Relevant Bodies in Arizona

Applicable Taxes in Arizona
Key Pay Elements That Impact Payroll in Arizona
Step-by-Step Guide to Payroll in Arizona

Laws That Affect Payroll Procedures in Arizona

In Arizona, payroll procedures are influenced by a combination of state and federal laws. Employers need to understand these laws to ensure they’re meeting all legal requirements.

Arizona Laws

  • Arizona Revised Statutes: The Arizona Revised Statutes, often abbreviated as ARS, is the official compilation of all the laws the Arizona State Legislature enacted. It serves as the primary legal reference for the state, encompassing a wide range of subjects, from criminal law and civil procedures to taxation and environmental regulations.
  • Minimum Wage: Arizona sets its own minimum wage, which is much higher than the federal rate. As of January 2024, Arizona’s minimum wage stands at $14.35. 
  • Overtime: Arizona overtime laws are governed by the Fair Labor Standards Act (FLSA). Under FLSA, any work done beyond 40 hours in a week is considered overtime and should be paid at 1.5 times the regular hourly rate. But unlike certain states with daily overtime rules, Arizona doesn’t have specific guidelines for daily overtime.
  • Paid Breaks or Lunch Periods: Arizona has no laws mandating employers to offer meal breaks or lunch periods. Should employers choose to grant breaks to their employees, they must adhere to guidelines established by the Department of Labor (DOL). According to the DOL, short breaks lasting 20 minutes or less should be compensated because they contribute to productivity. In contrast, lunch breaks lasting 30 minutes or more, during which employees are entirely off-duty and not working, are not required to be paid.
  • Pay periods: Employees are entitled to receive all the money they’ve earned, which includes their wages and applicable tips and bonuses. As per ARS 23-351, these payments should occur at least twice a month on set paydays that are no more than 16 days apart. If one of these paydays falls on a holiday, the employer should pay on or before the holiday or on the next regular payday if an employee leaves the company.
  • Arizona Paid Sick Leave Laws: In Arizona, all employers need to offer paid sick leave to their employees. Employers with 15 or more employees can accrue 1 hour of paid sick leave for every 30 work hours, with a maximum accrual and usage limit of 40 hours per year unless the employer chooses a higher limit. Employers with fewer than 15 employees follow a similar rule, with employees accruing 1 hour of paid sick leave for every 30 work hours, but with a maximum limit of 24 hours per year unless the employer decides on a higher limit.
  • Payroll Recordkeeping: According to the Arizona Department of Economic Security, all employers, regardless of their liability for unemployment taxes, must maintain specific records for the most recent four calendar years. These records should include check stubs, canceled checks for all payments, cash receipts and disbursement records, a payroll journal, a general journal, and more.
  • Payroll Taxes: You’ll need to deal with several state taxes when you run payroll in Arizona. This includes State Unemployment Tax and Worker’s Compensation. There’s also the state’s income tax. Thankfully, income tax in Arizona has a pretty straightforward flat tax rate of 2.5%. 
  • Final Pay: As per ARS 23-353, when an employee is let go by their employer, they must receive their owed wages within seven working days or by the end of the next regular pay period, whichever comes first.

Federal Laws

  • Fair Labor Standards Act (FLSA): The FLSA is a federal statute that sets important rules for workers. It covers things like the minimum wage you must be paid and the number of hours you can work in a week before getting overtime pay. The FLSA also defines who can be considered an employee and who is exempt from these rules. It helps protect workers by ensuring they are paid fairly and not overworked.
  • Family and Medical Leave Act (FMLA): The FMLA helps eligible employees by allowing them to take unpaid leave for important family or medical reasons, like caring for a new child, a family member with a serious health condition, or certain military-related situations. Eligible employees under FMLA can take up to 12 weeks of job-protected leave per year without losing their health insurance coverage. Employers must continue to contribute to an employee’s health insurance and maintain other benefits.
  • Federal Unemployment Tax Act (FUTA): If you’re paying state unemployment tax, you’ll likely also need to pay the FUTA taxes. FUTA mandates that employers contribute to unemployment benefits for eligible employees who become unemployed. While it doesn’t come directly from your employees’ paychecks, you must account for FUTA contributions in each payroll cycle. In most cases, there’s a 6% tax on the first $7,000 of an employee’s annual earnings. Some industries may have exceptions, but this is the standard rule.

HR Laws

  • Child Labor Requirements: Arizona’s child labor regulations are detailed in the Arizona Youth Employment Law (A.R.S. § 23-230 et seq.). These rules cover work hour limits, restrictions on nighttime work, and specific jobs minors cannot do. Minors under 18 can work in the state without needing special forms or written parental consent. Employers need to ask for proof of age from the minor, which can be any legal document.
  • Posting Requirements: Employers are obligated by law to display employee notices about things like minimum wage and workplace safety in easily accessible areas. This rule applies to both on-site and remote workers, ensuring that all employees can access this information physically or electronically.
  • Arizona New Hire Reporting: Employers in Arizona are required to report new hires within 20 days of their hire date, as mandated by Arizona Revised Statute 23-722.01 and the federal Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 (42 U.S.C. 653A). To do this, you can use the Arizona New Hire Reporting Form.
  • Hiring and Termination Laws: The Equal Employment Opportunity Commission (EEOC) has set clear rules against discrimination in employment and termination practices. These rules cover various important factors, including biological sex, race, national origin, religion, sexual orientation, age (for those between 40 and 70), pregnancy, child or spousal support withholding, AIDS/HIV status, gender, gender identity, and disability. It’s also against the law to give or withhold bonuses, merits, or wages based on these factors. 

Worker Classifications in Arizona

Worker classification is a critical aspect of employment in Arizona, and understanding the differences between employees and independent contractors is essential for both employers and workers. These distinctions significantly impact various aspects of payroll and taxation.

Employees vs Contractors

Employees work for a company under the company’s rules. They have set hours, get equipment and training, and can get benefits like health insurance and paid time off. Employers are responsible for withholding income taxes and benefits like Social Security and Medicare from employees’ paychecks, and they also pay a portion of these taxes on behalf of their employees. 

On the other hand, independent contractors are self-employed individuals who provide services to clients. They have more autonomy and control over how they perform their work, including setting their own schedules and using their own tools. They are responsible for filing and paying their own income taxes, including self-employment tax, and do not receive employee benefits. Independent contractors are also not covered by labor laws related to minimum wage and overtime.

Misclassifying workers can lead to serious legal consequences. This is why employers in Arizona typically use what’s known as the “Common Law Test” to determine the proper classification of their workers. The recently passed Arizona House Bill 2114 also provides guidelines for classifying workers in the state.

Common Law Test

The Common Law Test is a set of guidelines used by the IRS to help determine if someone is working as an employee or an independent contractor. One important factor in this test is “direction or control,” which looks at how much control the business has over the worker.

Other factors include:

  • Independent contractors choose when, where, and how they work.
  • Employees receive training, while independent contractors are already skilled.
  • Contractors can hire their own help.
  • Contractors are usually paid per job, while employees get hourly wages.
  • Employers provide tools for employees, but independent contractors use their own.
  • Contractors run their own businesses, can make profits, or face losses. They can also work for different businesses and offer services to the public.
  • Employees can be let go or leave without consequences, but contractors can only be terminated if they don’t meet contract terms.

Not all 20 factors of the common law test may apply to your business. However, it’s a good starting point for understanding how workers may be classified in Texas.

For further understanding of the entitlements of both salaried and hourly employees, individuals can refer to our articles on your rights as a salaried employee in Arizona, and your rights as an hourly employee in Arizona.

Arizona House Bill 2114

Arizona House Bill 2114, in effect since 2016, allows workers to confirm their independent contractor status by signing a “declaration of independent business status.”

This law addresses concerns about classification issues that many hiring entities face nationwide. The new law offers suggested phrasing for the declaration, outlining that the worker understands them. Some of these include:

  • Are an independent contractor, not an employee, and therefore do not qualify for employee benefits like unemployment benefits.
  • Are not covered by the company’s workers’ compensation insurance.
  • Can accept work from other businesses.
  • Must provide their own tools and adhere to licensing requirements.
  • Are responsible for business-related expenses and income taxes.
  • Have the authority to set work days and times, with the company able to enforce quality standards and deadlines.

While a signed declaration serves as evidence of the worker’s independent contractor status, they still have the opportunity to present evidence to the contrary if needed.

Payroll Forms and Relevant Bodies in Arizona

Paperwork involving payroll can be a bit of a maze. You’ll need to find your way around state and federal payroll forms. To do it right, you’ll need to have a good understanding of what forms you need, what they’re for, and who the relevant payroll bodies are in Arizona.

Let’s break it down.

Arizona Payroll Forms

  • Arizona Quarterly Tax Report: This form is for reporting and paying your unemployment taxes.
  • A-4 State Tax Withholding Form: New employees in Arizona need to fill out this form within 5 days of starting their job. If they don’t, their employer will withhold 2.0% of their wages as Arizona income tax until they submit a completed A-4 form.
  • JT-1: Used to register with the Arizona Department of Revenue. This form covers both income withholding and unemployment insurance taxes. It is used by both the Arizona Department of Revenue and Economic Security.

Federal Payroll Forms

  • W-4 Form: This helps employers figure out how much tax to withhold from employees’ paychecks.
  • W-2 Form: Shows the total earnings an employee made in a year (one per employee).
  • W-3 Form: Summarizes the yearly wages and taxes for all employees.
  • Form 940: Calculates and reports unemployment taxes to the IRS.
  • Form 941: Submits quarterly income and FICA tax withholding information.
  • Form 944: Reports annual income and FICA tax withholding.
  • 1099 Forms: Gives contractors the info they need to calculate their taxes, including how much they were paid.

Federal and Arizona Payroll/Tax Bodies

  • Arizona Department of Revenue: This department handles income tax for individuals and corporations, making sure it’s collected and enforced correctly. You can use the Arizona Department of Revenue’s website to get forms, check the latest rules, and learn about different business taxes.
  • Industrial Commission of Arizona: The Industrial Commission of Arizona oversees and enforces laws that protect Arizona’s workers. This includes workers’ compensation, safety regulations, wage payment, and child labor laws. If you need information about these rules, the commission is your go-to source.
  • Arizona New Hire Reporting Center: The Arizona New Hire Reporting Center is responsible for collecting and maintaining information about newly hired employees in the state. They offer comprehensive new hire reporting services and provide answers to common questions about complying with new hire requirements.
  • Arizona Department of Economic Security: The Arizona Department of Economic Security offers details on how unemployment taxes are calculated. Their mission is to offer temporary aid to Arizona residents working towards self-sufficiency.
  • Internal Revenue Service (IRS): The IRS, a part of the U.S. Department of the Treasury, is the government agency responsible for taxes. It collects taxes, manages tax laws, assists taxpayers, and conducts audits to ensure people and businesses follow tax laws and pay their tax dues.
  • The Social Security Administration (SSA): The SSA oversees employee programs for retirement, disability, survivor benefits, and family support. The SSA also provides Social Security Numbers, essential for employment, finances, and government services, and assists with Medicare enrollment.
  • Wage and Hour Division (WHD): The WHD is a branch of the U.S. Department of Labor. Its main job is to ensure that employers adhere to labor standards that safeguard workers’ rights. WHD enforces laws like the Fair Labor Standards Act, which covers minimum wage, overtime pay, recordkeeping, and child labor regulations.

Applicable Taxes in Arizona

In Arizona, like in all states in the United States, individuals and businesses are subject to both state and federal taxes. Here’s an overview of the applicable taxes in Arizona that can affect your payroll process.

State Taxes

  • Arizona Income Tax: Arizona used to have two income tax rates: 2.55% and 2.98%. But as of 2023, the state has changed it to a flat rate of 2.5%, adding it to the 19 other states that currently use a flat income tax rate. This also makes the tax structure much more straightforward for payroll.
  • Arizona Unemployment Tax: As per Arizona’s unemployment insurance tax chart released on January 5, 2023, the unemployment tax rates in the state will vary depending on an employer’s track record. If you’re an established employer with a good track record, your tax rate can be as low as 0.07% or as high as 9.39%. If your track record isn’t so great, your tax rate can range from 9.91% to 18.78%. For new employers, the tax rate remains 2%. These rates are slightly lower compared to the previous year.

Federal Taxes

  • Federal Income Tax: There are currently seven federal income tax brackets in 2023. Your tax rate will depend on how much you earn and how you file your taxes. For 2023, the income limits for these brackets have gone up by around 7% compared to 2022, mainly because of high inflation. This could result in some individuals being in a lower tax bracket than before. Federal income tax for 2023 will be due on April 15, 2024.
  • Federal Insurance Contributions Act (FICA): FICA serves as the funding source for both Social Security and Medicare programs, which offer benefits to retirees, individuals with disabilities, and children. Under FICA, as an employer, you are required to contribute to Social Security and Medicare by withholding taxes from your employees’ wages. This means deducting a specific percentage from your employees’ taxable earnings for Social Security and another percentage for Medicare. These deducted amounts are then submitted as federal payroll taxes under FICA. So, how much are you required to contribute to FICA? Well, the FICA tax rate for 2023 is 7.65 percent, consisting of a 6.2 percent Social Security rate and a 1.45 percent Medicare rate. If an employee’s wage exceeds a certain threshold, it could increase to 8.55 percent.
  • Federal Unemployment Tax: In Arizona, employers have to pay an annual FUTA tax that helps cover the costs of running the Unemployment Insurance program. This tax amounts to 6.2% of the first $7,000 in wages paid to each employee in a year. If you can pay state taxes promptly, you could get a credit of 5.4% to lower the FUTA tax amount.

Key Pay Elements That Impact Payroll in Arizona

Aside from the taxes discussed in the previous section, there are other key pay elements that can significantly impact the payroll process for both employers and employees. Understanding and managing these elements is crucial to ensure accurate and compliant payroll practices.

Minimum Wage

At the start of 2024, Arizona’s minimum wage increased to $14.35 from $13.85 the previous year.

However, not all workers in Arizona qualify for this minimum wage. Exceptions encompass:

  • Domestic workers, such as babysitters.
  • Employees working for family members.
  • Workers employed by the Arizona or federal government.
  • Employers whose businesses generate less than $500,000 annually are not subject to the Fair Labor Standards Act (FLSA).

It is important to highlight that these exceptions exist to accommodate unique work arrangements and small enterprises. However, it is recommended to seek guidance from local authorities to verify the applicability of minimum wage regulations to your employees.

Overtime

Overtime happens, and when it does, Arizona employers are expected to follow the overtime regulations set by the FLSA. As per FLSA, workers are entitled to get 1.5 times their regular pay for hours worked exceeding 40 per week.

It’s important to note that FLSA doesn’t require overtime pay for work on Saturdays, Sundays, holidays, or regular days off unless overtime hours are worked on those days. If you have policies regarding these types of overtime, it’s crucial to communicate them clearly to your employees and ensure they comply with state and federal standards.

Not all workers will be entitled to overtime, with some of the common exemptions including:

  • Administrative employees
  • Executive employees
  • Professional employees
  • Outside sales employees
  • Drivers
  • Agricultural employees
  • Partsmen and mechanics

Learn more details about Arizona Overtime Laws.

Commission and Bonus Amounts

In Arizona, wage payment laws distinguish between two types of compensation: nondiscretionary and discretionary.

Nondiscretionary bonuses, which are promised and can be measured, are considered wages and are protected by wage laws. Employers are obligated to pay them when promised.

Discretionary bonuses, on the other hand, are not considered wages. These are bonuses that employers may give at their discretion without a specific promise regarding the amount or timing.

If a bonus is discretionary, employees have no legal claim to it. Arizona law does not compel employers to pay discretionary bonuses, even if they have been given in the past, such as year-end bonuses that vary based on various criteria. However, if there is a clear agreement stating that an employee will receive a fixed percentage of all collections, the employee has a right to that percentage once the money is collected, assuming there are no additional terms or conditions in the agreement.

Tip Credit

In industries where tipping is common, employers have the option to pay their employees a lower hourly wage, which can be up to $3 less than the state’s regular minimum wage of $14.35. However, there’s a condition: the combination of the hourly wage and the tips the employee receives must add up to at least the standard minimum wage. This arrangement is known as “Tip Credit.” 

It’s important to note that Arizona does not specify a minimum threshold for the amount of tips an employee must receive to qualify as a “tipped employee.” This means that any employee who receives tips can be paid according to Arizona’s laws governing tipped minimum wages.

Pay Stub Laws

Employers using payroll cards must give their employees a clear record of their earnings and deductions with each deposit, either in writing or electronically. They also need to furnish a list of all the fees linked to the payroll card account of these employees.

Arizona Pay Frequency Laws

As outlined in ARS 23-351, employers in the state must follow specific rules for paying their hourly employees. Payment should be made at regular intervals, which should occur at least twice a month and be scheduled so that the paydays are not more than 16 days apart. If a scheduled payday falls on a holiday or weekend, employers are required to issue payments to their employees in advance of the holiday or weekend.

Worker’s Compensation Insurance

Arizona law mandates employers to provide their employees with workers’ compensation insurance, often referred to as just “worker’s comp.” This is a no-fault system designed to provide financial and medical benefits to employees who are injured or become ill as a result of their job, regardless of who causes the injury.

On average, in the U.S., worker’s comp costs $1.19 for every $100 of payroll, as reported by the National Academy of Social Insurance. But in Arizona, worker’s comp would cost $0.67 per $100 of payroll. This cost would vary depending on a number of factors, including the insurance company used by the employer and the class of the employee’s job.

Garnishments and Deductions

A writ of garnishment is a court order that instructs an employer to deduct a portion of an individual’s earnings until a debt is paid off or until the court cancels the order. The law protects a portion of one’s income from garnishment, especially for those with very low earnings, except when it pertains to child support or tax collection.

Arizona follows the federal Consumer Credit Protection Act (CCPA) regarding wage garnishment limits. Under CCPA, the maximum amount that can be garnished from your non-exempt disposable earnings is either 25% of your pay or any wages exceeding thirty times the federal minimum wage, whichever is lower. 

Final Paycheck

According to ARS 23-353, when an employee is let go by their employer, they must receive their owed wages within seven working days or by the end of the next regular pay period, whichever comes first. If an employee chooses to resign from their job, they should be paid their outstanding wages through the usual payment method no later than the standard payday for the pay period when the termination took place. Upon the employee’s request, these wages can also be sent by mail.

Step-by-Step Guide to Payroll in Arizona

Running payroll in Arizona involves several steps to ensure that you’re compliant with state and federal laws while accurately compensating your employees. Let’s break down each step in detail:

  1. Identify Payroll Laws Applicable to Your Company: Before you even start processing payroll, it’s crucial to understand the applicable payroll laws and regulations in Arizona. Research topics like minimum wage, overtime rules, and other key pay elements that can influence your payroll process. If you’re in the restaurant industry, you might be able to use tip credit to reduce the amount you pay employees. Or if you’re hiring minors, you’ll need to restrict working hours in accordance with Arizona child labor laws. Knowing the regulations at play at the state and federal levels is crucial to ensure you’re on the right track.
  2. Register for an Employer Identification Number (EIN): To set up your business as an employer, you’re going to need an EIN. An EIN is like a special ID number provided by the IRS for tax purposes. To get one, simply apply online on the IRS website or fill out Form SS-4.
  3. Register as an Employer in Arizona: After getting your EIN, you’ll also need to register as an employer with the Arizona Department of Revenue (ADOR) by completing the Arizona Joint Tax Application (Form JT-1). This form covers various taxes like withholding tax, transaction privilege tax, use tax and unemployment insurance. If you need assistance, the Arizona Department of Revenue offers a helpful guide for businesses.
  4. Create Your Payroll Process: Determine your pay frequency (weekly, bi-weekly, or monthly), establish pay rates, and decide on your payroll cycle. Document all these details to ensure consistency. Now, you can either manage payroll on your own, use an Excel payroll template, or opt for a payroll service. Each choice has its pros and cons, so it’s best to explore them further to make an informed decision that suits your business needs.
  5. Set Up a System to Track Work Hours: Setting up a reliable system to track work hours is a cornerstone of accurate payroll processing. You can use time clocks or manual timesheets to record employee work hours. You can also use dedicated time and attendance tracking software to streamline your timekeeping process. It’s also best to opt for time tracking and attendance software that can calculate overtime hours to meet overtime labor regulations.
  6. Review and Approve Employee Timesheets for the Pay Cycle: Before processing payroll, review and approve employee timesheets. Ensure that hours worked are accurately recorded and that any overtime or special pay is accounted for.
  7. Calculate Payroll, Deduct Necessary Taxes, and Pay Employees: Now comes the nitty-gritty part. Calculate each employee’s gross pay based on their hourly rate and hours worked. Deduct federal and state income taxes, Social Security, and Medicare, as well as any other applicable deductions like health insurance or retirement contributions. Make sure you’re following both state and federal tax laws. After that, cut paychecks or arrange for direct deposits to your employees.
  8. Don’t Forget to File Federal and State Taxes: The IRS provides federal tax filing forms and instructions, including unemployment tax information. You can also request official IRS tax forms. For Arizona state taxes, you need to report withholding tax on both an annual and quarterly basis. To report annual withholding tax, use form A1-APR, and for quarterly reporting, use form A1-QRT. These forms and instructions are available on their website. Be sure to meet all deadlines to avoid penalties.
  9. Document and Store Your Payroll Records: Maintaining meticulous payroll records in Arizona is crucial. As per the Arizona Department of Economic Security, all employers, regardless of their unemployment tax status, must keep essential records for the most recent four calendar years. These records should encompass check stubs, canceled checks, cash receipts, payroll and general journals, and other pertinent financial documents. This practice ensures compliance with state regulations and helps safeguard your business in potential audits or disputes.

Final Thoughts

Running payroll in Arizona demands attention to detail, adherence to state and federal regulations, and a commitment to accuracy. By following the steps outlined in this guide, from understanding applicable payroll laws to maintaining comprehensive records, you can navigate the payroll process in Arizona with confidence.

If you’re looking for ways to streamline your payroll operations further, consider exploring our list of the top 6 apps designed to simplify payroll in the US. Alternatively, if you already have an established system in place, we’ve provided ten valuable tips to optimize your payroll processes in the US. Whatever your payroll needs may be, staying informed and utilizing the right tools can make the task of running payroll in Arizona more manageable and efficient.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.