Arizona Tax & Labor Law Summary
Basics and Requirements
After you hire a household employee in Arizona, the next things to take care of are the payroll and taxes. To help you take this next step, we've compiled all the federal and state "nanny taxes" into this overview. Use it as a resource when you have questions or just call us and we'll take care of everything for you.
When a family hires someone to perform duties in or around their home, they are considered a household employer. The IRS views the worker whether a nanny, health aide, housekeeper, senior caregiver, gardener, chef, personal assistant, estate manager, etc. as an employee of the family in nearly every case. Misclassifying an employee as an independent contractor (using Form 1099) is considered tax evasion, so please call us if you're not sure how to classify your worker.
Household employers have four primary tax responsibilities. These are sometimes referred to as the Arizona nanny tax obligations:
1. Withhold Social Security and Medicare taxes from their employees paycheck each pay period. Federal income taxes should be withheld based on the employees selections on Form W-4.
* It is not legally required that federal income taxes be withheld. However, we strongly advise it so that the employee does not have a large tax burden at the end of the year and is not subjected to underpayment penalties.
2. Pay the employers portion of Social Security and Medicare, as well as federal and Arizona unemployment insurance taxes (FUTA and SUTA). Some Arizona household employers may be required to pay a small Job Training Tax.
Good news! There are some tax breaks for dependent care that can help offset these employer taxes. For an estimate of your employer costs and your tax breaks as well as your employees take-home pay give us a call.
3. File tax forms with the Arizona Department of Economic Security, typically on a quarterly basis, and with the IRS in April, June, September and January. With these filings, employers remit (pay) the employee taxes withheld and the employer taxes accrued.
4. At the end of the year, prepare Form W-2 and distribute to each employee, file Form W-2 Copy A and Form W-3 with the Social Security Administration and file Schedule H with your personal income tax return.
LABOR LAW REQUIREMENTS
The Fair Labor Standards Act (FLSA) provides the framework for federal and state wage and hour law. Household employees are classified under the FLSA as non-exempt workers. Non-exempt workers in all 50 states are covered by the rules and protections of the FLSA. Arizona may supplement the federal law with additional state and municipal labor law.
The current Arizona minimum wage rate: $11.00 per hour
Flagstaff minimum wage rate: $12.00 per hour
Note: Whenever more than one rate applies, employers are required to pay the higher rate.
Overtime requirements are not determined by the amount of hours or by the type of pay (hourly or salary); they are determined by the type of work. The FLSA requires domestic workers be protected by overtime laws. The requirements for Arizona household employers are as follows:
The standard workweek is defined as 40 hours in a 7-day period.
Arizona employees should be paid at least 1.5 times the regular hourly rate (time-and-a-half) for all hours worked over 40 in a workweek.
Overtime compensation is not required for live-in employees.
Overtime is not required to be paid when work is performed on a holiday.
Paid Sick Time
Household employers in Arizona are required to provide up to 24 hours of paid sick time to their employee each calendar year. Sick time accrues at 1 hour for every 30 hours worked and unused sick time can carry over to the next year. Employers may require their employee to wait until after 90 days of employment to begin using paid sick time. Additionally, employers should give their employee written notice regarding paid sick time at the start of employment. Any unused sick time does not have to be paid out upon termination.
The current federal mileage reimbursement rate is 58 cents per mile. This rate, which covers the cost of gasoline as well as general wear and tear on the car, should be used to calculate reimbursement payments to an employee who drives her own vehicle while on the job. Mileage reimbursement is not considered taxable compensation, so neither the employee nor the employer is required to pay any taxes on that portion of the compensation.
Note: Miles driven while commuting to and from the jobsite are not considered on the job. If the employer reimburses the employee for commuter mileage, it is considered taxable compensation.
Workers Compensation Insurance
Household employers in Arizona are not required to carry a workers compensation insurance policy. However, we recommend obtaining coverage because it assists with medical expenses and lost wages if an employee has a work-related injury or illness. It also provides protection to the employer since workers who accept benefits generally forfeit their right to sue the employer regardless of fault. As part of the HomePay setup process, we can guide you to a convenient, affordable solution.
Arizona unemployment insurance is a state-managed program that provides financial assistance to help laid-off workers make ends meet until they can find another job. This insurance is funded through taxes that employers are required to pay on wages paid to employees. These taxes flow into a general fund, and unemployment benefits are distributed from the fund to employees who are let go from their job due to no fault of their own. The Arizona Department of Economic Security (DES) determines whether or not an applicant qualifies for benefits after reviewing their online or paper application and/or by conducting a telephone interview. Benefits paid to a former employee by the DES may trigger a future tax rate increase for the employer.
Household employers in Arizona are NOT required to pay for their employees health insurance. However, there is a tax incentive to do so. Families with only 1 employee can make contributions toward their employees health insurance premiums and treat the amount as non-taxable compensation. In this scenario, neither the employee nor the employer are required to pay any taxes on that portion of the compensation.
Note: Employers with 2 or more employees must purchase a policy through SHOP (Small Business Health Options Program) to gain this benefit.
Families can direct their employees to www.care.com/benefits where they can search for health insurance policies and purchase coverage for themselves.