Setting up payroll for your child care business in Arizona can seem like a daunting task, but with the right information and resources, it can be straightforward. This guide will walk you through everything you need to know about getting started with payroll in Arizona, from obtaining necessary tax account numbers to understanding how unemployment tax rates are determined. By following these steps, you'll ensure that your business complies with state regulations and that your employees are paid accurately and on time.

Who needs to pay payroll taxes in Arizona?

Most employers are required by law to pay unemployment taxes on the first $8,000 in gross wages paid to each employee within a calendar year. An employer can be an individual, partnership, corporation, limited liability company, or any other entity for which a worker performs a service. In order to qualify as an employer in Arizona, you must meet at least one of the following conditions:

1. Pay wages of at least $1,500 during a calendar quarter

2. Employ at least one worker for some part of a day in each of 20 different weeks in a calendar year

3. Acquire the business or part of the business of an employer already subject to unemployment taxes

4. Are required to pay Federal Unemployment Tax because you employed any individuals in any other state or for any other reason

5. Own or control two or more businesses in Arizona which together meet any of the other conditions described here

6. Pay domestic/household workers at least $1,000 cash wages in a calendar quarter

7. Pay agricultural workers at least $20,000 cash wages in a calendar quarter, or employ at least 10 agricultural workers for some part of a day in each of 20 different weeks in a calendar year

8. Are a nonprofit organization exempt under section 501(c)(3) of the Internal Revenue Code, and employ four or more individuals for some part of a day in each of 20 different weeks in a calendar year

9. Voluntarily elect to provide unemployment coverage to your workers even though it is not required

10. Are a leasing or temporary services business that leases or provides workers to other businesses

11. Are an Indian tribe, or are any subdivision, subsidiary, or business enterprise wholly owned by an Indian tribe.

What You’ll Need:

To get your child care business set up with payroll, you’ll need the following:

• Arizona Unemployment Tax Account Number

• Arizona Withholding Account Number

• Arizona Unemployment Tax Rate

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 your Unemployment Tax Account Number on any previously submitted Unemployment Tax and Wage Reports (UC-018) or by calling the Arizona Department of Economic Security at 602-771-6602.

Missing your Arizona Tax Account Numbers?

You can get 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 the Department of Revenue and the Department of Economic Security.

Once your registration is processed (this can take about 2-3 weeks), you’ll receive your Arizona Unemployment Tax Account Number. If you have yet to receive your Unemployment Tax Account Number but have already registered more than a month since you applied, reach out to the Employer Registration Unit at 602-771-6602.

Arizona Withholding Account Number

Your Arizona Withholding Account Number is a nine-digit account number formatted as:

• XX-XXXXXXX

This number is the same as your Federal Employment Identification Number (FEIN). You must be registered with the Arizona Department of Revenue for your FEIN to be connected to your Arizona Account,

In order to have an Arizona Unemployment Tax Account Number and Arizona Withholding Account Number, you must be registered as an employer. Payroll services like Playground Payroll use these numbers to make 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 determines tax rates with a “reserve ratio” system. New employers are assigned a 2.0% tax rate for a minimum of two calendar years. Afterward, employers may be eligible for a higher or lower tax rate depending on the following:

1. Amount of taxes paid

2. Amount of unemployment benefits paid to former employees and charged to you

3. 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 and then dividing by the employer’s average taxable payroll every year. This 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.

Further Reading

https://des.az.gov/services/employment/unemployment-employer/employment-taxes-calculating-unemployment-taxes

https://des.az.gov/content/applying-unemployment-insurance-tax-account-number