Employment Taxes - Calculating Unemployment Taxes

How much are unemployment taxes?

(The following 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 the tax rates.  If you are a new employer (other than a successor to a liable employer), you are assigned a tax rate of 2.0 percent for a minimum of two calendar years. After that, you may be eligible for a higher or lower tax rate depending on:

1. The amount of taxes you have paid;
2. The amount of unemployment benefits paid to your former employees and charged to you;
3. The average size of your annual taxable payroll.

An employer’s experience rate is determined by the reserve ratio. Each year the 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. The average taxable payroll is the average of up to three fiscal years depending on how long the employer has paid wages. The reserve ratio, which can be either positive or negative, determines the rate an employer will be assigned.

Each year the department determines the rates for positive-rated employers and negative-rated employers. The Tax Rate Chart lists each ratio group and the assigned rate for the ratio groups. 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 employers’ actual experience with the Unemployment Insurance program. It also encourages employers to stabilize their workforces and monitor their ex-employees’ unemployment claims, thereby helping to prevent abuse and minimize charges to their accounts.

High rates of unemployment 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) (UC-603 Sample 345 KB PDF) advising you of your tax rate for the 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.

Related Links:

• Employment & Wages
• Reporting Wages
• Paying Taxes
• Unemployment Insurance Tax Rate Chart
• Unemployment Insurance Tax Rates for Previous Years