If your small business staff includes hired employees, your financial responsibilities will include adjusting their paychecks for income tax withholding. In Arizona, there are multiple options for state withholding percentages, and as with most tax laws, things can get complicated. The purpose of this article is to provide an “Arizona Withholding 101” summary of what business owners most need to know.
“Withholding” refers to an employer’s responsibility to pay each employee’s estimated income tax, by directing a percentage of gross taxable wages to the government tax office rather than paying it directly to the employee. For state income taxes, Arizona offers seven withholding percentage options:
Calculating the exact amount is the employer’s (your) responsibility.
First right to choose state withholding percentage belongs to the employee, who by accepting a job assumes responsibility to request a specific withholding amount. This is done by completing an Arizona Withholding Percentage Election form (Arizona Form A-4), preferably within the first five days of employment. Employees also may fill out a separate form (A-4C) to request that their withholding rate be reduced and the difference contributed to nonprofit or educational organizations. If a new employee fails to complete an A-4 within the first week of employment, the employer is required to withhold at the median rate of 2.7% until the employee officially requests a change.
It’s best to head off possible misunderstandings by briefing each new employee on the rules of A-4 and other withholding, and by double-checking that the employee has access to the proper forms and knows how to fill them out. (Ideally, ask a tax management expert for advice and for a more detailed summary of the whys and hows.)
When filling out the forms, new employees will also need to know if a specific withholding percentage is standard practice at your business. Even if you aren’t planning on such recommendations, your effectiveness as an employer will benefit from basic understanding of how to choose the ideal percentage.
Since withholding is based on estimated taxes, the goal is to keep the estimate as accurate as possible—to withhold a total amount near equal to the amount due calculated by the government at official tax time. If the withheld amount is lower than the actual amount due, the taxpayer (your employee) will have to pay the balance directly to the government, which could be a financial hardship if the difference is significant. If the withheld amount is higher than the amount due, the balance will be refunded—but in the interim, the taxpayer will have been without access to funds that could have been put to other uses.
Ideal withholding percentage differs by each individual taxpayer and depends on multiple factors: salary level, overall family budget, savings and investment goals, eligibility for tax deductions and exemptions. If you want to help all your employees find their personal best percentages—and improve office morale in the process—consider hiring a certified tax expert to offer your staff a tax seminar or individual coaching.
If you do bring in an outside tax expert—or any other independent contractor—remember that you won’t be withholding anything from their paychecks. State withholding requirements also do not apply to many part-time and nonresident workers, or to paid work done outside an employee’s official job. Clarity on who is actually an “employee” is very important for accurate filing of both state and federal taxes, so if you have any doubts on whether someone qualifies, get advice from a financial or legal expert. “Better safe than sorry” is always a best principle in the complicated world of taxes.
Understanding the best approach to withholding, or any other tax-related procedure, is complicated to say the least. That’s why the professionals at Clear View Business Solutions are ready to help by answering your questions, making things understandable, and taking tax-preparation duties off your hands. We help eliminate complications, delays, and frustrations, and we work with you to ensure everything is accurate and compliant.
Learn more about how we can help you by contacting Clear View Business Solutions online, or by phone at (520) 544-0177. Our team is always there for you!
At Clear View Business Solutions, we know you want your business to prosper without having to worry about whether you are paying more in taxes than you should or whether your business is set up correctly. The problem is it's hard to find a trusted advisor who can translate financial jargon to layman's terms and who can actually help you plan for better results.
We believe it doesn't have to be this way! No business owner should settle for working with a CPA firm that falls short of understanding what you want to achieve and how to help you get there.
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At Clear View Business Solutions, we know you want your business to prosper without having to worry about whether you are paying more in taxes than you should or whether your business is set up correctly. The problem is it's hard to find a trusted advisor who can translate financial jargon to layman's terms and who can actually help you plan for better results.
We believe it doesn't have to be this way! No business owner should settle for working with a CPA firm that falls short of understanding what you want to achieve and how to help you get there. With over 20 years of experience serving hundreds of business owners like you, our team of experts combines financial expertise and proactive communication with our drive to help each client achieve results and have fun along the way.
Here's how we do it:
Discover: We start with a consultation to understand your specific goals, what's holding you back, and what success looks like for you.
Strategize & Optimize: Together, we design a customized strategy that empowers you to progress toward your goals, and we optimize our communication as partners.
Thrive: You enjoy a clear view of your business and your financial prosperity.
Schedule a consultation today, and take the first step toward being able to focus on your core business again without wondering if your numbers are right- or what they mean to your business.
In the meantime, download, "The Business Owner's Essential Guide to Tax Deductions" and make sure you aren't leaving money on the table.
