Arizona LLC Taxes
Arizona LLCs have a default tax status as pass-through entities, which means the LLC’s income is reported on the members’ individual tax return. LLC members are taxed at a 15.3% rate, while LLCs that choose C-corp status are taxed at 4.9%. In addition to this state income tax, LLCs pay transaction privilege tax, local city/county taxes, and occasionally industry-specific taxes. Keep reading to learn more about Arizona LLC taxes.
In this article, we’ll cover:
How are Arizona LLCs taxed?
An Arizona LLC is taxed based on the number of owners, also called members. If your Arizona LLC is a single-member LLC, it is taxed as a disregarded entity and you will submit taxes the same way a sole proprietorship does. If your business is a multi-member LLC, you will be taxed the same way a general partnership is taxed. This means reporting the LLC’s revenue on the members’ personal income tax return.
These are the default tax filing statuses for all Arizona LLCs. In order to be taxed differently, you will need to apply for either S-corp or C-corp tax election status. Below, we’ll detail how you can apply to change your default tax status.
Arizona LLCs taxed as S-corp
To have your Arizona LLC taxed as an S-corp, you will need to file Form 2553 with the Internal Revenue Service (IRS). S-corp tax election is available for LLCs or corporations, and must be approved by the IRS. (Take a look at the IRS requirements for S-corps before submitting your application.)
S-corps are taxed as pass-through entities, just like an LLC’s default status. However, one benefit that you wouldn’t otherwise get with an LLC’s default tax status is that S-corps are allowed to make distributions to members.
In other words: with the LLC’s default status, you have to pay self-employment tax on any income or profit you personally get from the business’ revenue. With the S-corp status, you can pay yourself your salary, which is subject to the 15.3% self-employment tax, and also give yourself a dividend from leftover profit which would not be subject to the self-employment tax.
S-corp tax report form: Form 1120-S
Arizona LLCs taxed as C-corp
Arizona LLCs can elect to be taxed as a C-corp, which is the default tax status for corporations. C-corps have something called “double taxation,” which means that the income for the business is taxed once as corporate income and then a second time on shareholders’ personal returns. So why choose it?
Well, some LLC members choose C-corp election because of the corporate tax deductions, which are greater than LLC tax deductions. Additionally, C-corp election can be more attractive to investors, so companies looking to go public or raise money might choose this tax election.
C-corp tax report form: Form 1120
Learn how to apply for C-corp status as an LLC.
Arizona State Income Tax
Arizona requires members of LLCs with default tax status to pay personal income tax on any profits that the LLC makes. Currently, Arizona has a 15.3% self-employment tax, which is what all default-tax LLCs (and sole proprietorships, general partnerships, and individual Arizona residents) pay on their income.
LLCs that choose to be taxed as a C-corp must pay corporate income tax of 4.9% or $50, whichever is greater. The Arizona Department of Revenue (ADOR) also requires all corporate taxpayers to include a copy of their federal tax return, as well as pay quarterly estimated taxes if the taxable income will be over $1,000.
Transaction Privilege Tax
Sometimes called sales tax, the transaction privilege tax (TPT) is required for the privilege of conducting businesses in Arizona. Although all businesses making sales are required to pay TPT, the actual amount you owe varies depending on what industry sector, city, and county your business is in.
To start selling, you’ll need to submit the Arizona Joint Tax Application (JT-1). This application is for TPT, use tax, employer withholding tax, and unemployment insurance tax. The filing fee for this application also depends on your location, ranging from $2 to $50. To see how much it costs in your city/county, you can download JT-1 and scroll to the bottom, where the city fees are listed.
TPT licenses must be renewed every year by January 1st. If you sell your business to a new owner or move your business’ location, the business will need a new TPT license.
Note: If your TPT was over $500 last year, you’re required to file and pay electronically. To file a paper return or pay with cash/check, you’ll have to pay a 5% penalty.
Not sure what your tax rate is? Use the ADOR TPT Tax Rate Look Up page!
Local Arizona Taxes
Each city and county in Arizona will have their own tax requirements for businesses. Local tax law can have different requirements, tax rates, and supplemental fees compared to just the state and federal tax law, so make sure you’re keeping up to date with any local tax requirements. For example, Tempe has a TPT and use tax of 1.80% each, whereas Phoenix has a 2.30% TPT and use tax.
Other Taxes in Arizona
In addition to general income tax, corporate income tax, and TPT, businesses in Arizona have an obligation to pay any industry-specific or employer taxes that are required on the federal, state, and local level. Let’s go over a few of the most common.
Arizona State Employer Taxes
If you choose to hire employees in Arizona, you will need to pay withholding employment, unemployment insurance, and workers’ compensation taxes.
- Withholding Employment Taxes. Arizona businesses must withhold taxes from employees’ wages. This form is connected to the Arizona Joint Tax Application (JT-1). If your employees do not fill out their Arizona Form A-4, Arizona Withholding Percentage Election, you must withhold 2% automatically until they elect their percentage. However, Native Americans, military spouses, and some non-residents may qualify for a withholding employment tax exemption.
- Unemployment Insurance Taxes. Arizona requires all businesses with employees to apply for an unemployment tax account, which is also completed on the JT-1 application. The unemployment insurance tax rate ranges from .08% to 20.93%, depending on the “reserve ratio” that your business meets. You can check your unemployment tax ratio rate on the Department of Economic Security’s website.
- Workers’ Compensation Taxes. Workers’ compensation in Arizona is required for all employers. Workers’ compensation benefits employees with job-related illness or injuries by allowing them to receive medical benefits, temporary and permanent compensation, or even death benefits. You can file for workers’ compensation by taking out an insurance policy from a company approved by the Arizona Department of Insurance. Fees vary depending on industry, company size, location, and more.
In addition to licensing, Arizona requires that certain businesses pay industry-related taxes. This can range from city to city, so make sure to check with your local business corporations division about which taxes your business will need to pay.
A few common Arizona industry taxes include the alcohol luxury tax, tobacco luxury tax, and bingo tax. While many industry-specific taxes are included in the TPT, check with your attorney or the Arizona Department of Revenue to make sure you’re in compliance with all industry-specific taxes.
Do foreign LLCs in Arizona need to pay Arizona taxes?
Yes, foreign LLCs in Arizona must pay Arizona taxes. In order to conduct business in Arizona, a foreign LLC will need to file the Arizona Joint Tax Application (JT-1) with ADOR. Since tax rates and additional tax requirements differ from city to city, make sure to check with the local city government to stay on top of any taxes to keep your foreign LLC in good standing.