Setting up payroll for your child care business in Arizona may seem challenging, but with the right guidance, it can be quite manageable. This guide will provide you with essential information on establishing payroll in Arizona, covering everything from obtaining necessary tax account numbers to understanding how unemployment tax rates are determined. By following these steps, you’ll ensure your business complies with state regulations and your employees are paid accurately and on time.
Who Needs to Pay Payroll Taxes in Arizona?
Most employers in Arizona are required to pay unemployment taxes on the first $8,000 in gross wages paid to each employee annually. An employer can be an individual, partnership, corporation, LLC, or any other entity for which a worker performs services. To qualify as an employer in Arizona, you must meet at least one of the following conditions:
- Pay wages of at least $1,500 during a calendar quarter.
- Employ at least one worker for part of a day in each of 20 different weeks in a calendar year.
- Acquire the business or part of the business of an employer already subject to unemployment taxes.
- Are required to pay Federal Unemployment Tax because you employed individuals in another state or for any other reason.
- Own or control two or more businesses in Arizona that together meet any of the other conditions listed here.
- Pay domestic/household workers at least $1,000 in cash wages in a calendar quarter.
- Pay agricultural workers at least $20,000 in cash wages in a calendar quarter, or employ at least 10 agricultural workers for part of a day in each of 20 different weeks in a calendar year.
- Are a nonprofit organization exempt under section 501(c)(3) of the Internal Revenue Code and employ four or more individuals for part of a day in each of 20 different weeks in a calendar year.
- Voluntarily elect to provide unemployment coverage to your workers even though it is not required.
- Are a leasing or temporary services business that leases or provides workers to other businesses.
- Are an Indian tribe, or a subdivision, subsidiary, or business enterprise wholly owned by an Indian tribe.
What You’ll Need
To set up payroll for your child care business, you’ll need the following:
Arizona Unemployment Tax Account Number
Your Arizona UI Employer Account Number is an eight-digit account number formatted as either:
- XXXXXXXX
- XXXXXXX-X
You can find this number on any previously submitted Unemployment Tax and Wage Reports (UC-018) or by contacting the Arizona Department of Economic Security at 602-771-6602.
Missing Your Arizona Tax Account Numbers?
You can obtain your Arizona Payroll tax account numbers by registering on the Arizona Department of Revenue and Department of Economic Security’s website. Online registration will register you with both departments. Once processed (typically 2-3 weeks), you’ll receive your Arizona Unemployment Tax Account Number. If you’ve been waiting over a month since registering, contact the Employer Registration Unit at 602-771-6602.
Arizona Withholding Account Number
Your Arizona Withholding Account Number is a nine-digit number formatted as:
- XX-XXXXXXX
This number is the same as your Federal Employment Identification Number (FEIN). You must register with the Arizona Department of Revenue to connect your FEIN to your Arizona account. Payroll services like Playground Payroll use these numbers to handle Arizona state tax payments and filings on your behalf.
Arizona Unemployment Tax Rate
(This does not apply to certain nonprofit and governmental employers, Indian tribes, and churches/religious organizations that have chosen the reimbursement payment option.)
Arizona uses a “reserve ratio” system to determine tax rates. New employers are assigned a 2.0% tax rate for at least two calendar years. After this period, employers may receive a higher or lower rate depending on the following factors:
- Amount of taxes paid
- Amount of unemployment benefits paid to former employees and charged to you
- The average size of annual taxable payroll
This ratio is calculated by adding the taxes paid in and subtracting the benefit payments (charges) from the accumulated reserve, then dividing by the employer’s average taxable payroll each year. The average taxable payroll is the average of up to three fiscal years, depending on how long the employer has been paying wages. The reserve ratio, which can be either positive or negative, will determine the rate employers will be assigned.
The Department of Revenue determines the rates for both positive-rated and negative-rated employers. The Tax Rate Chart lists each ratio group and their assigned rate. Employers with a positive reserve ratio are assigned the lowest tax rates, while negative ratio employers are assigned substantially higher rates.
This system ensures an equitable distribution of the cost of the system based on an employer’s experience with the Unemployment Insurance program. It also encourages employers to stabilize their workforces and monitor their former employees’ unemployment claims, thereby helping to prevent abuse and minimize charges to their accounts.
High unemployment rates in the state can produce higher tax rates in subsequent years; conversely, low unemployment can produce lower tax rates.
At the beginning of the year, you will receive a Determination of Unemployment Tax Rate (UC-603) advising you of your tax rate for that calendar year. This notice contains your tax rate and all the factors used in calculating your reserve ratio. If you disagree with the rate assigned or any of the calculations, you may appeal by following the instructions on the notice.
Make sure you provide a copy of your rate notice to your tax return preparer so that your taxes are calculated at the correct rate.
For more detailed information, you can refer to Playground’s guide.
