Who Is An Employee?
The relationship between you and your workers determines whether your workers are employees. An employment relationship exists when a worker performs services for you that are subject to your control, or right to control, whether or not you actually exercise the control.
Generally, an employment relationship exists when the services performed are a regular part of your business. It is presumed that, in order to protect your business interests, you have the right to control the manner in which workers perform services for you.
The services may be performed on a full-time, part-time, temporary, seasonal, or probationary basis. They may be performed on or off your premises or in employees' own homes. Corporate officers, including officers of closely held corporations, are employees of the corporation whether or not they receive wages.
In contrast, "independent contractors" are customarily engaged in an independent trade, occupation, profession, or business. They usually advertise their services, are in a position to realize profit or suffer a loss as a result of their services, and usually have a significant investment in the business. Individuals, who have been found not to be employees for federal unemployment tax purposes by the IRS will not be considered employees for state unemployment taxes for the periods determined in the IRS writing.
If you have any questions about whether your workers are employees, please contact any of the Tax Audit Offices listed in our Field Office Directory.
I have a domestic employee in my home. Do I need to pay unemployment tax on these wages?
Once the total amount of wages you pay for domestic services in a calendar quarter equals or exceeds $1,000, you will be liable for state unemployment taxes on the first $8,000 ($7,000 before January 1, 2023) gross wages you pay each domestic worker in that entire calendar year and each year thereafter.
All wages paid must be reported and any taxes owed will be due on a quarterly basis. These wages should not be confused with federal unemployment tax, which is due annually on domestic service and is filed with your 1040 return on a schedule H by April 15 of each year.
See Arizona Revised Statutes, Section 23-613.C for the legal definition of "Employer" as it pertains to domestic services.
Do I report the wages of part-time or temporary employees?
You must report part-time and temporary employees, with the following exceptions. You should not report employees who work for you less than 13 days in a calendar quarter if you never intended to employ them for a longer period or on an on-call or other recurring basis. You should not report students participating in a work study program (DECA or internship) who are hired and receive school credit while working during the school year; however, if they are retained for summer employment, then wages earned during the summer are to be reported.
What if my employees work in more than one state?
If you have employees working in Arizona and one or more other states, the following guidelines and diagram (23 KB PDF) will help you correctly report their wages and pay unemployment taxes.
If you have questions about properly reporting wages and paying unemployment taxes, please contact the Employer Registration Unit or any of the Tax Audit Offices listed in our .
What Is Exempt Employment?
Employees are included under the unemployment insurance law, unless their services are specifically excluded. If a service is excluded, it is not counted in determining your liability for taxes, and payments for those services should not be included on your quarterly wage reports. You should not report payments to the following:
Other services described in Arizona Revised Statutes sections 23-613.01 and 23-617.
What wages must be reported?
All payments to your employees for services are wages and must be reported (before deductions) on your quarterly Unemployment Tax and Wage Report, unless specifically excluded by law. You must report salaries, commissions, bonuses, fees, fringe benefits, sick pay, deferred compensation, tips reported to you by your employees, and the cash value of payments in any medium other than cash (such as gifts). Employer contributions (to the extent elected by the employee) to 401(k) plans are also wages. Be aware of types of payments for which you do not have to pay taxes.
The following payments, excluded by law, should not be reported:
My business is a corporation, and I am a corporate officer. Why do I have to report the wages that I earn from my corporation?
Your corporation is an artificial entity treated by law as separate from you and, as a corporate officer you are its employee for Arizona and federal UI tax purposes. Wages that you earn from the corporation are usable as wage credits if you ever need to file a claim for unemployment benefits.
The amount and duration of unemployment benefits potentially available to you will depend on your earnings and the conditions of your separation from employment.
I am a Member/Member-Manager of my LLC. Do I have to report my wages and pay taxes?
Multi-member limited liability companies (LLCs) that are treated as partnerships for federal employment tax purposes are treated as partnerships for Arizona UI tax purposes. Members and Member-Managers of such LLCs are not reportable.
Single-member and multi-member LLCs that have elected federal tax treatment as a corporation are treated as corporations for Arizona UI tax purposes. All Members and Member-Managers of such LLCs are, therefore, reportable.
Single-member LLCs that have not elected federal tax treatment as a corporation are treated as a sole proprietorship for federal employment tax purposes. Arizona treats such LLCs the same for UI tax purposes. Member-owners of such LLCs are not reportable.
Can I get unemployment insurance coverage for my workers even if I’m not required to provide coverage?
If you have not met any of the statutorily defined conditions (also refer to Arizona Revised Statutes, Section 23-613) that require you to provide unemployment insurance (UI) coverage, but you want to get UI coverage for your workers, you may apply for voluntary coverage.
The Arizona Joint Tax Application form JT-1/UC-001 includes a section entitled "Voluntary Election of Unemployment Insurance Coverage" where you are given the option of applying for voluntary coverage. Check the appropriate box in that section and submit the form to the Department of Revenue (address is printed on the form). If you have already submitted your form to the Department of Revenue, have not yet received your Department of Economic Security unemployment insurance tax number, and it has been more than one month since you submitted the form, please contact the Employer Registration Unit.
Note: If voluntary coverage is approved, you must continue to cover your employees for at least two full calendar years.
What is the difference between gross, total and taxable wages?
Both total and taxable wages are reportable on the quarterly Unemployment Tax Wage Report (UC-018).
Gross wages are the total amount of wages paid to an employee before deductions. This includes, but is not limited to, salaries, wages, commissions, bonuses, overtime pay, incentive awards and tips. All of the types of remuneration that are considered wages for unemployment insurance (UI) reporting purposes are defined in Arizona Revised Statutes, Section 23-622.
Total wages for UI reporting purposes are the total of the gross wages paid.
Taxable wages for UI reporting purposes are the first $8,000 ($7,000 before January 1, 2023) in total gross wages paid to each employee in a calendar year. You must continue reporting employees' wages even after the base of $8,000 ($7,000 before January 1, 2023) for each worker is met. This is because wages reported quarterly are used to establish eligibility for unemployment insurance benefits regardless of whether taxes were due on those wages.
All wages must be reported for the quarter in which they were paid to the worker.
What if I no longer have any employees but expect to in the future?
When employment has discontinued but is expected in the future, you must choose one of the following two actions to avoid numerous problems:
Warning: If you stop submitting reports without your account being suspended, this will create delinquent reports and could result in higher future tax rates being computed for your account based on estimated wages.