Quick Answer
Arizona employers withhold income tax at a flat 2.5% — one of the lowest flat rates in the country. SUI runs 0.08%–20.93% (new employer rate: 2.0%) on a $8,000 wage base, administered by AESD. The minimum wage is $14.70/hr (2026, CPI-indexed under Prop 206). Prop 206 also mandates paid sick leave: 1 hour per 30 hours worked, up to 40 hours for employers with 15+ employees (24 hours for smaller employers). Final paychecks are due by the next regular payday or within 7 days, whichever is sooner.
Table of Contents
Arizona made a major shift in 2023 when voters' passage of Proposition 208 was superseded by legislative action that consolidated Arizona's graduated income tax brackets into a single flat 2.5% rate. For employers running payroll, that simplification was welcome. Every employee now gets withheld at the same rate — no bracket math, no marginal rate juggling.
The rest of Arizona's payroll picture involves Proposition 206, the voter-approved measure that set the state's minimum wage above the federal floor and created a mandatory paid sick leave requirement. Both obligations are firmly embedded in law and have been upheld against legal challenges. If you employ people in Arizona, these rules apply to you.
Arizona Payroll at a Glance
| Obligation | Rate / Amount | Wage Base / Limit | Who Pays |
|---|---|---|---|
| SUI | 0.08%–20.93% (new: 2.0%) | $8,000 per employee | Employer only |
| AZ Income Tax Withholding | Flat 2.5% | All wages | Employee (withheld by employer) |
| State SDI / PFL | None | — | — |
| Minimum Wage | $14.70/hr (2026) | — | — |
| Paid Sick Leave | 1 hr per 30 hrs worked | Up to 40 hrs (15+ employees) | Employer obligation |
State Income Tax: Flat 2.5%
Arizona's 2.5% flat income tax rate is one of the more employer-friendly withholding regimes in the US. There are no brackets, no phase-outs, no surtaxes. Every dollar of Arizona taxable income is taxed at 2.5%, from the first dollar to the last.
Employee Withholding Form A-4
New Arizona employees complete Form A-4 (Arizona Withholding Percentage Election) to elect how much Arizona income tax to withhold. Unlike the federal W-4, which uses allowances and adjustments, Arizona's A-4 lets employees choose a withholding percentage. Options typically range from 0.5% to 6.0%, with 2.5% as the standard rate.
Employees who want extra withholding can choose a higher percentage. Those who expect no Arizona tax liability can request zero withholding by claiming an exemption on the A-4. If an employee doesn't submit an A-4, withhold at 2.0% until they provide the form.
A-4 Is Required for Each New Hire
You must have a completed A-4 on file for every Arizona employee. Keep these forms with your payroll records — ADOR may request them during an audit. Employees can update their A-4 at any time; the new withholding election takes effect on the next payroll after you receive the form.
Remitting Arizona Withholding
Arizona income tax withholding is remitted to the Arizona Department of Revenue (ADOR). Filing frequency depends on the amount withheld:
- Quarterly: If your Arizona withholding is less than $200 per quarter
- Monthly: If your Arizona withholding is $200–$1,500 per quarter
- Semi-weekly: If your Arizona withholding exceeds $1,500 per quarter
All Arizona withholding filings are done through AZTaxes.gov, ADOR's online filing portal. Year-end reconciliation uses Form A1-R, due January 31 along with W-2s for all Arizona employees.
State Unemployment Insurance (SUI)
Arizona SUI is administered by the Arizona Department of Economic Security (AESD). Employers pay SUI; employees do not contribute. The $8,000 wage base means SUI applies only to the first $8,000 each employee earns per calendar year.
SUI Rates for 2026
- New employer rate: 2.0%
- Experienced employer range: 0.08% to 20.93%
- Taxable wage base: $8,000 per employee per year
- Maximum annual cost per employee (new employer at 2.0%): $160
- Maximum possible annual cost per employee (at 20.93%): $1,674.40
Arizona's SUI rate range is notably wide — 0.08% to 20.93%. The high end of that range means employers with significant layoff history face substantial per-employee SUI costs despite the low $8,000 base. Protecting your experience rating by minimizing avoidable layoffs pays off in Arizona.
Arizona's Rate Range Is One of the Widest in the US
A 20.93% maximum SUI rate is unusually high. Most states cap their maximum at 10%–14%. Arizona's ceiling reflects its experience-rating structure, where employers with heavy claims history face aggressive rate increases. If your industry has high turnover (hospitality, construction), your SUI rate warrants close attention each year when AESD sends your new rate notice.
Quarterly SUI Filing with AESD
Quarterly SUI returns are filed through the AESD Employer Portal. You report each employee's wages and the SUI owed each quarter. Deadlines: April 30 (Q1), July 31 (Q2), October 31 (Q3), January 31 (Q4).
Minimum Wage: Proposition 206
Arizona voters passed Proposition 206 in November 2016, setting a path to $12/hr by 2020 and indexing the rate to the CPI thereafter. The 2026 rate of $14.70 per hour reflects years of annual CPI adjustments. The rate is announced each fall by the Industrial Commission of Arizona and takes effect January 1.
Posting Requirements
Arizona requires employers to post the current minimum wage rate in the workplace. The Industrial Commission provides the required poster each year after announcing the new rate. Failure to post is a violation, though penalties are modest. Download and replace the poster each January.
Tipped Employees
Arizona allows a tip credit for tipped employees. The tip credit is $3.00 per hour, meaning you can pay a tipped employee as little as $11.70 per hour ($14.70 - $3.00) as long as tips bring total compensation to at least $14.70. If tips don't cover the gap, you pay the difference. You must notify employees in writing if you intend to use the tip credit.
Overtime
Federal FLSA overtime rules apply: non-exempt employees earn 1.5x their regular rate for all hours over 40 in a workweek. Arizona has no additional state overtime requirements beyond FLSA.
Paid Sick Leave Requirements Under Prop 206
Proposition 206 didn't just set the minimum wage — it also created Arizona's mandatory paid sick leave law, formally called the Fair Wages and Healthy Families Act. Every Arizona employer must provide paid sick leave to every employee.
Accrual Rates
- Employers with 15 or more employees: Employees accrue 1 hour of paid sick leave for every 30 hours worked, up to a maximum of 40 hours per year
- Employers with fewer than 15 employees: Same accrual rate (1 hr/30 hrs), but the annual cap is 24 hours per year
Accrual starts on the first day of employment. Employees can begin using accrued sick leave after 90 days of employment. Hours carry over from year to year, but employers may cap usage at 40 (or 24) hours annually.
Permitted Uses
Employees may use paid sick leave for their own illness or injury, care for a family member, public health emergencies, or issues related to domestic violence, sexual assault, or stalking. The list of permitted uses is broad.
Front-Loading as an Alternative
Employers can satisfy the sick leave requirement by front-loading the full 40 hours (or 24 hours) at the beginning of each year rather than tracking accrual throughout the year. Front-loading eliminates the need to track accrual and is administratively simpler for businesses that don't use payroll software with accrual tracking built in.
Anti-Retaliation
Prop 206 prohibits retaliation against employees who use or request sick leave. Disciplining, demoting, or terminating an employee for taking lawfully accrued sick leave exposes you to wage claims, civil penalties, and potential lawsuits. Document attendance issues carefully and separately from sick leave usage.
Final Paycheck Rules
Arizona requires final wages to be paid by the next regular payday or within 7 days of the termination date — whichever comes first. This dual-trigger rule means you can't always wait for the next scheduled payday.
Example: An employee quits on a Monday. Your regular paydays are every other Friday. The next payday is 11 days away. In that case, you must pay within 7 days of the quit date — not on the regular payday.
Conversely, if the regular payday falls within 7 days of termination, that payday deadline controls. The rule is: whichever comes first.
Accrued Vacation
Arizona law doesn't specifically mandate payout of unused vacation at termination. But if your written policy or employment contract promises payout of accrued vacation, Arizona courts treat that promise as a wage obligation. A "use it or lose it" policy is permissible if it's clearly stated in writing and employees have reasonable opportunity to use leave before it expires.
Federal Payroll Taxes
Arizona payroll obligations layer on top of federal requirements:
- Social Security: 6.2% employer + 6.2% employee on wages up to $176,100
- Medicare: 1.45% employer + 1.45% employee on all wages; 0.9% Additional Medicare Tax on employee wages over $200,000
- FUTA: 6.0% on first $7,000, reduced to 0.6% with state UI credit
- Federal income tax withholding: Per each employee's W-4
Registering as a New Employer in Arizona
Two registrations are required before running your first Arizona payroll:
- AESD registration: Register with the Arizona Department of Economic Security for your SUI account. Done online at azdes.gov. You'll receive a UI employer account number used for all quarterly SUI filings.
- ADOR registration: Register with the Arizona Department of Revenue through AZTaxes.gov for your withholding account. You'll use this for income tax remittances and year-end reconciliation.
Both registrations require your FEIN, business formation details, and projected payroll information. Process time is typically a few business days for online registrations.
Filing Deadlines and Penalties
Arizona Withholding Penalties
- Late filing: 4.5% of the tax due per month, up to 25%
- Late payment: 0.5% per month on unpaid balances, plus interest at the state rate
- Failure to withhold: Employer is liable for the amounts that should have been withheld
SUI Penalties
- Late quarterly report: 10% of contributions due for the quarter
- Late payment: Interest at the statutory rate on unpaid SUI contributions
Sick Leave Violations
Violations of the Prop 206 sick leave requirements can result in back wages for denied leave, civil penalties, and ADOR enforcement actions. The minimum penalty is typically the wages the employee would have earned during the denied leave period.
Payroll Software for Arizona
Arizona's combination of flat income tax withholding, Prop 206 sick leave accrual tracking, CPI-indexed minimum wage, and quarterly AESD filings makes a payroll platform worth every dollar. Platforms like Gusto handle all of it automatically and update for Arizona's annual minimum wage changes.
Frequently Asked Questions
What is Arizona's state income tax rate for 2026?
Arizona has a flat 2.5% state income tax rate. This applies to all taxable income, with no brackets. It's one of the lowest flat rates in the country and makes withholding calculations straightforward.
What is the Arizona SUI rate for new employers in 2026?
New employers pay 2.0% on the first $8,000 of each employee's annual wages, administered by AESD. Experienced employers are assigned rates from 0.08% to 20.93% based on claims history.
What is Arizona's minimum wage in 2026?
Arizona's minimum wage is $14.70 per hour in 2026, set by Prop 206 and adjusted annually for CPI. A $3.00 tip credit is available for tipped employees, bringing the minimum direct wage to $11.70/hr for those workers.
Does Arizona require paid sick leave?
Yes. Under Prop 206, employees accrue 1 hour of paid sick leave per 30 hours worked. Employers with 15+ employees allow up to 40 hours per year; smaller employers cap usage at 24 hours per year. Accrual begins on the first day of work; usage is allowed after 90 days.
When is a final paycheck due in Arizona?
The final paycheck must be paid by the next regular payday or within 7 days, whichever comes first. Don't assume you can always wait until the next scheduled payday.
Where do Arizona employers register for SUI?
Register with the Arizona Department of Economic Security (AESD) through their online employer portal at azdes.gov. Separately, register with ADOR through AZTaxes.gov for withholding. Both registrations are required before running payroll.
Simplify Arizona Payroll
Gusto handles Arizona income tax withholding, AESD SUI filings, Prop 206 sick leave tracking, and annual W-2s. Trusted by 300,000+ small businesses.
Legal & Tax Disclaimer
This article is for general informational purposes only and does not constitute legal, tax, or professional advice. Employment laws, tax regulations, and compliance requirements change frequently. The information on this page reflects our understanding as of the date noted above and may not reflect recent changes in Arizona or federal law.
Always consult a qualified attorney, CPA, or HR professional familiar with Arizona law before making payroll or compliance decisions for your business.