Arizona LLC Taxes

In order to make sure your business is compliant with all applicable federal, state, and local regulations, it’s vital you understand the various tax obligations that apply to your Arizona limited liability company (LLC). 

In this article, we’ll explore the Arizona LLC taxes your business will need to pay and walk you through the correct process for filing them.

Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes. 

How Is an LLC Taxed in Arizona?

Taxation in Arizona isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax election.

While LLCs typically benefit from pass-through taxation by default, they can elect to be taxed as one of the following:

• C Corporations: The LLC is treated as a separate entity to its owners, paying corporate income tax rates on its total profit while the owners also pay personal income taxes on any distributions they take.
• S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay FICA or self-employment taxes on them.

The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in Arizona to help you ensure your LLC navigates them effectively.

Arizona Local Taxes

The local laws and tax regulations differ greatly between different localities in Arizona, where there are currently a number of unique taxes in place at a local level.

Below is a list of tax types that your city or county may impose:

City Transaction Privilege Tax

The Transaction Privilege Tax (TPT) is placed on vendors for the privilege of conducting business within the state. In addition to a statewide rate, a number of counties and cities in Arizona impose their own additional TPT rate on both general and specific types of transactions.

For example, the city of Tempe levies TPT at a rate of 1.8% while Phoenix does so at a rate of 2.3% – in areas like these, businesses are required to pay both local and state TPT rates.

You’ll need to obtain a TPT license from the city in which your business is based before you can begin selling. If you operate in multiple locations within Arizona, you’ll need to either obtain a license for each individual location or apply for a consolidated license while reporting your aggregate sales. 

Note: To help you identify the tax rate in your local area, use the ADOR Tax Rate Look-Up Tool.

Property Tax

In Arizona, there is no statewide property tax; instead, it is set and managed by 15 county officials across the state. In particular, the process of calculating how much your business owes in property taxes and collecting it is handled by two officials:

• County Assessors: Except for certain centrally assessed properties like airlines, mines, railroads, and utilities, these officials are responsible for classifying and determining the value of all property located within their jurisdiction.
• County Treasurers: Each county appoints a treasurer who’s responsible for collecting property taxes and distributing them properly.

Note: For more information on how to pay property tax in your local area, you can use the Arizona Association of Counties website to reach out to your local officials.

Recommended: Schedule a free consultation with 1-800Accountant to ensure your business remains legally compliant. 

Arizona State Taxes

Every state has its own regulations and rules that dictate how it taxes individuals and businesses. Below is a list of the most relevant state-level taxes for LLCs in Arizona. 

Income Taxes

This group of taxes refers to the charges imposed by the state on the earnings of individuals and business entities operating within Arizona. Specifically, it includes:

• Personal Income Tax: Currently, the state income tax is a gradual tax with two brackets: one at a rate of 2.55% for filers with a taxable income under $27,273 (double if filing jointly) and another at a rate of 2.98% for taxable income above this limit. However, in an effort to simplify the tax system, the state intends to eventually reduce this to a flat tax rate of 2.5% for all income levels.
• Small Business Income (SBI) Tax: Small business owners can choose to file their business earnings separately from their personal income using a distinct tax return — where they will instead be taxed at a flat rate of 2.8% (note that this is scheduled to decrease to 2.5% in 2025).
• Corporate Income Tax: A flat tax rate of 4.9% imposed on all the taxable income of corporations (and LLCs with C Corp elections) that has been generated from business activity within Arizona.

Understanding the nuances of Arizona income tax is crucial for individuals and businesses as they form a central part of your statewide tax responsibilities.

Transaction Privilege Tax

In Arizona, there is technically no state sales tax. Instead, the Arizona Department of Revenue (ADOR) administers the Transaction Privilege Tax (TPT) to vendors for the privilege of conducting business within the state.

While a statewide rate of 5.6% is imposed on all businesses involved in the sale of tangible goods, in practice this can often range up to as much as 11.2% due to the additional rates of certain industries and localities.

Some specific business activities and industries that are covered by the TPT include:

• Hotels and motels
• Restaurants and bars
• Personal property rentals
• Metal mining

Before your business can begin selling, it will first need to submit the Arizona Joint Tax Application (JT-1) to the Department of Revenue and pay the appropriate filing fee, which can vary from $1 up to $50 depending on your location. 

Note: You can find a full list of all the business activities and industries that are covered by TPT as well as their specific tax rates on the Department of Revenue’s Tax Rate Tables.

Business Privilege Taxes

In Arizona, there are a number of statewide taxes and charges levied on LLCs for the privilege of engaging in certain specific sectors and business activities. While many of these activities are included as part of the Transaction Privilege Tax, a number of them are taxed separately. Some of the most common ones include:

• Bingo Tax Licenses
• Liquor Luxury Tax
• Tobacco Luxury Tax 

The specifics of each of these taxes – including rates, filing requirements, and exemptions – will vary on a case-by-case basis, which makes it important to consult an accountant in order to ensure your LLC’s compliance.

Employer Taxes

If your business hires any employees in Arizona, there are two main obligations to be aware of when it comes to handling taxes related to employment:

Withholding Employment Tax

Your business must withhold 2% of each employee’s income by default until the employee elects a different withholding rate using Arizona Form A-4. Amongst other more specific exemptions, this doesn’t need to be done for employees with no income tax liability.

In order to withhold this income, you’ll need to register your business’s Employer Identification Number (EIN) with ADOR by completing the Arizona Joint Tax Application (JT-1), which will become available after enrolling for an account with AZTaxes.

Unemployment Insurance Tax

Businesses must pay this tax on the first $8,000 in gross wages each employee is paid at a rate that varies between 0.08% and 18.78% depending on your business’s “reverse ratio.” This is a measure of the financial health of your business in relation to unemployment claims that are used to determine the rate you should pay according to this Tax Rate Chart.

If your business is liable to pay unemployment insurance tax, you’ll be mailed a “Determination of Unemployment Insurance Liability” form by the Arizona Department of Economic Security (DES). This should contain the date your UI coverage begins, your tax rate, and your Arizona UI employer account number.

Understanding how to file payroll taxes is essential to ensure your LLC complies with both its state and federal tax obligations — which we’ve explored in greater detail below.

Federal Taxes

Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below are some of the main types your LLC may be required to pay for federal tax purposes:

Income Tax

By default, the IRS will not treat single and multi-member LLCs as separate entities from you and your partners for tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income taxes on them at the personal rate of your tax bracket.

Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which can change how you need to pay federal income tax. 

Self-Employment Tax

In addition to needing to pay income taxes, members of single- and multi-member LLCs will need to pay self-employment tax on the share of the business’s profits that they report on their personal tax return at the end of the year.

This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.

Employment Tax

If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.

Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.

Excise Tax

If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.

Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.

How to File LLC Taxes in Arizona

Below, we’ve outlined the general process an LLC in Arizona will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in. 

Step 1: Gather Your Documentation

To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:

• You and your partner’s Social Security number, date of birth, and residential address
• The previous year’s tax returns
• Your LLC’s Employer Identification Number (EIN)

Then, you’ll need to gather all documentation related to your business’s income, such as:

• Invoices you’ve issued
• Sales transaction logs
• Electronic payment reports from services like PayPal or Stripe

Lastly, assemble all records pertaining to your business expenses, which should cover:

• Lease receipts for your business premises
• Bills for utilities
• Records of office supplies purchases
• Documentation of business-related travel
• Payroll records for employees

Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return. 

Step 2: Find The Right Tax Forms

Once you've gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:

• Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
• Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
• C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it's a weekend or holiday.
• S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The deadline for filing taxes using 1120-S is March 15 or the following business day.

Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.

With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.

Step 3: File Your Taxes

The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:

• Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
• State Tax Returns: Depending on the specific tax, the filing requirements can vary. But, you can use AZTaxes or Arizona Luxury Tax Online to file the majority of your state taxes electronically.
• Local Tax Returns: The filing requirements can vary depending on the specific tax, so be sure to contact the local governing agency in your locality for more information.

Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form. 

For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings. 

Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes. 

Keep Your Arizona LLC Compliant

While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant. 

Transaction Privilege Tax License

In order to keep your transaction privilege tax license valid, you’ll need to renew it annually by paying a renewal fee of up to $50 to the Department of Revenue on or before January 1. TPT licenses are only valid for the calendar year they were issued in, which means that you’ll need to renew your license by this date regardless of when you obtained it.

Once paid in full, you should receive a new TPT license certificate at your business’s mailing address within two weeks of the renewal being processed. 

Note: If your business had an annual TPT liability of $500 or more during the previous calendar year or is based in more than one location, it will need to file its taxes online using AZTaxes.

Licensure and Tax Requirements

In Arizona, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below, we’ve broken down three of the most common types your LLC may need:

• Professional and Specialized Licensing: In Arizona, individuals involved in certain professions are often required to secure specific licenses to operate legally. For instance, medical practitioners must be licensed through the Arizona Medical Board. The requirements for these licenses differ depending on the profession and the respective regulatory board overseeing it.
• Environmental Licensing: Businesses that have the potential to impact water quality, air quality, or intend to handle hazardous waste must obtain the relevant permits from the Arizona Department of Environmental Quality (ADEQ). The specific type of permits necessary will depend on your business’s activities you intend to perform.

Note: For a full list of the statewide licenses and permits your LLC may need, refer to the Arizona Department of Revenue (ADOR) website.

Arizona LLC Taxes FAQs