Arizona Business Tax Guide: Every Tax Your Company Pays in 2026

Every Arizona business deals with some combination of five tax buckets: state income tax, Transaction Privilege Tax (Arizona's version of sales tax), payroll tax, property tax on business equipment, and federal tax. Which ones apply to you, and how much you owe in each, depends on your entity type, whether you have employees, and what you sell. This guide walks through all five in order, with the current 2026 rates and thresholds for each.

Key Takeaways

• Arizona has a flat 2.5% individual income tax that applies to LLC, S-corp, partnership, and sole proprietorship profit, and a separate 4.9% corporate income tax for C-corporations.
• If you sell a taxable product or service, you need a TPT license. The state rate is 5.6%, but combined state, county, and city rates typically land between 7.8% and 11%+ depending on location.
• Remote sellers cross into Arizona TPT once they hit $100,000 in annual Arizona sales, the same economic nexus threshold that applies to marketplace platforms.
• Employees trigger three payroll obligations: Arizona withholding, Arizona unemployment insurance (on the first $8,000 of wages per employee), and federal FICA/FUTA.
• Business equipment is exempt from county property tax up to $500,000 of full cash value for tax year 2026, a major jump from about $270,000 the year before.

Do you need to register before you owe any of this?

Yes. Before you owe TPT or handle payroll, Arizona requires registration with ADOR for both. You'll need a federal EIN first (free, direct from the IRS), then a TPT license if you sell taxable goods or services, and a withholding registration if you have employees. Entity formation itself (LLC or corporation) goes through the Arizona Corporation Commission, a separate step from tax registration. If you're still deciding between an LLC, S-corp, or corporation, that choice affects almost everything below, so it's worth settling before you register for taxes, not after.

Arizona income tax on your business

How your business income gets taxed in Arizona depends entirely on your entity type. LLCs, S-corps, partnerships, and sole proprietorships are pass-through entities by default, so the business itself doesn't pay Arizona income tax. Profit flows to the owners' personal returns and gets taxed at Arizona's flat 2.5% individual rate, the same rate no matter how much you earn.

C-corporations work differently. They pay Arizona corporate income tax at 4.9% of Arizona taxable income, with a $50 minimum tax. If the corporation later distributes profit as dividends, shareholders pay the 2.5% individual rate on that too. That's the double-taxation trade-off that leads many small businesses to avoid the C-corp structure unless there's a specific reason for it.

There's also a separate, federal layer that catches sole proprietors, single-member LLC owners, and general partners: self-employment tax. The IRS charges 15.3% self-employment tax on 92.35% of net earnings, covering the Social Security and Medicare contributions an employer would otherwise split with you. This is where S-corp elections come into the conversation, since S-corp owners only pay FICA on their W-2 salary, not on the rest of the distribution. More on that trade-off below.

Arizona Transaction Privilege Tax (the "sales tax")

Arizona doesn't technically have a sales tax. It has a Transaction Privilege Tax, a tax on the seller for the privilege of doing business here, across 16 separate business classifications covering retail, restaurants, contracting, rentals, and more. Most businesses pass the cost to the customer, which is why it looks and feels like sales tax at checkout.

Rates. The state TPT rate is 5.6% for most classifications. Counties and cities add their own rates on top, so combined retail rates commonly run 7.8% to 11%+ depending on where you're located. Phoenix, Tucson, and Scottsdale all have different combined rates, so check your specific address rather than assuming a flat statewide number.

Licensing. You need a TPT license if you sell a taxable product or engage in a taxable service in Arizona. The state license fee is $12 per business location, and you'll typically also need a matching city license. Registration runs through AZTaxes.gov or the Arizona Joint Tax Application (Form JT-1), which covers TPT, withholding, and unemployment insurance in one filing.

Filing frequency and due dates. How often you file depends on your combined annual TPT liability: annually under $2,000, quarterly between $2,000 and $8,000, and monthly above $8,000. Returns are due the 20th of the month following the reporting period.

Remote sellers and marketplaces. If you sell through Etsy, Amazon, Adobe Commerce, or your own site and ship into Arizona, you cross into Arizona's TPT system once you hit $100,000 in annual gross Arizona sales, the same economic nexus threshold that applies to marketplace facilitators. Below that threshold, out-of-state sellers with no physical presence in Arizona generally don't need to register.

Payroll taxes if you have employees

Hiring your first employee adds three separate tax obligations on top of everything above.

Arizona withholding. Employees choose their own withholding percentage on Form A-4, from a set of fixed rates. If no form is filed, the default is 2.0%. You register for a withholding account through the same JT-1 process as your TPT license.

Arizona unemployment insurance. You owe state unemployment tax on the first $8,000 of gross wages paid to each employee per calendar year. New employers generally start at a 2.0% rate for their first two years before moving to an experience-rated rate.

Federal payroll tax. Every employer withholds and matches Social Security and Medicare (FICA) at a combined 15.3%, split 7.65% employer and 7.65% employee, up to the Social Security wage base of $184,500 for 2026 (Medicare has no wage cap). Federal unemployment tax (FUTA) applies on top, typically at an effective 0.6% on the first $7,000 of wages once the standard state credit applies.

Running this correctly and consistently matters beyond just compliance. If you've elected S-corp taxation to reduce self-employment tax exposure, the IRS expects your salary to reflect "reasonable compensation" for the work performed, and inconsistent payroll is one of the fastest ways to undermine that election if it's ever questioned. A dedicated payroll service handles the withholding, filings, and deposit deadlines so nothing slips.

Property tax on business equipment

Equipment, furniture, and fixtures used in your business are subject to county personal property tax, but only above an exemption threshold that increased significantly this year. For tax year 2026, the exemption is $500,000 of full cash value, up from roughly $270,000 in 2025. Most small businesses now fall entirely under this exemption. You still need to file a Business Property Statement with your county assessor by April 1 each year to claim it; skipping the filing doesn't remove the obligation, it just means the county values your property without your input.

Federal taxes every Arizona business owes

Arizona taxes sit on top of a federal tax base that doesn't go away no matter which state you're in.

• Federal income tax on pass-through profit, taxed at your individual bracket alongside your other income (LLCs, S-corps, partnerships, sole props).
• Federal corporate income tax at a flat 21% for C-corporations, a separate calculation from the Arizona 4.9% corporate rate.
• Self-employment tax at 15.3% for sole proprietors, single-member LLC owners, and general partners, as covered above.
• An Employer Identification Number (EIN), which you'll need before you can register for an Arizona TPT license or withholding account. You can apply for one directly through the IRS for free.
• Quarterly estimated payments, generally required once you expect to owe $1,000 or more in tax for the year and don't have enough withheld. If you fall behind on any of these federal obligations and the IRS sends a notice, IRS representation can help you sort out back taxes before penalties compound.

How much tax does $100,000 in business income actually cost?

This is one of the most common questions we get, and the honest answer is: it depends heavily on your entity choice. Here's a simplified comparison for $100,000 of net profit.

As a sole proprietor or default single-member LLC: You'd owe roughly $14,130 in federal self-employment tax (15.3% on $92,350, which is 92.35% of $100,000), plus Arizona's flat 2.5% on your Arizona taxable income, plus federal income tax at your regular bracket. The self-employment tax is the piece that surprises people, since it applies on top of income tax, not instead of it.

As an S-corp with a reasonable $50,000 salary and $50,000 distribution: FICA applies only to the $50,000 salary, at the combined 15.3% (split employer/employee) for a total of $7,650, versus $14,130 under the sole-proprietor scenario. That's about a $6,480 difference in this example. Arizona's 2.5% still applies to the full $100,000 either way, since Arizona doesn't distinguish between salary and distribution for its flat tax. Federal income tax also still applies to the full $100,000 regardless of structure.

This isn't a promise that every business saves money with an S-corp election. Reasonable compensation requirements, added payroll costs, and extra tax prep complexity all cut into the savings, and the math changes at different income levels. It's a calculation worth running with an advisor rather than assuming, since entity structure decisions depend on your specific numbers, not a generic rule of thumb.

What taxes do LLCs pay in Arizona?

To answer this one directly: a default Arizona LLC (not electing corporate or S-corp taxation) pays no entity-level Arizona income tax. Its owners pay Arizona's flat 2.5% on their share of profit, plus federal self-employment tax if they're active in the business, plus TPT if the LLC sells taxable goods or services, plus payroll tax if it has employees, plus property tax on business equipment above the exemption. The LLC itself owes the Arizona Corporation Commission nothing annual, no franchise tax and no annual report, which is a different question from what its owners and operations owe in tax.

DBAs, trade names, and local licensing

A few smaller pieces round out the picture. Arizona's Corporation Commission doesn't register or recognize "DBA" names; trade names go through the Arizona Secretary of State instead, separate from your TPT or entity registration. Beyond state-level TPT, many Arizona cities require their own local business or occupational license on top of your city TPT registration, so check with the specific city or cities where you operate. Certain regulated activities, like construction contracting, childcare, or liquor sales, layer on additional state licensing requirements regardless of entity type.

Arizona business tax calendar at a glance

Keeping this calendar straight across TPT, payroll, property, and income tax is exactly the kind of ongoing work that consistent bookkeeping is built to catch before a due date becomes a penalty.

Moving forward with confidence

Arizona's business tax picture isn't one tax, it's five separate systems that apply in different combinations depending on your entity, your employees, and what you sell. Getting the full picture right the first time, rather than discovering a missed TPT license or an unfiled property statement during an audit, is what separates a smooth tax season from a stressful one. K&R's CPAs and Enrolled Agents work through exactly this kind of multi-tax picture with clients across Arizona and nationwide.

Talk to K&R about your specific mix of Arizona and federal obligations so you know exactly what applies to your business this year. Book a consultation and we'll map it out together.

Frequently asked questions

What taxes do LLCs pay in Arizona? A default Arizona LLC pays no entity-level state income tax. Owners pay Arizona's flat 2.5% on their share of profit, federal self-employment tax if they're active in the business, TPT if the LLC sells taxable goods or services, payroll tax if it has employees, and property tax on business equipment above the $500,000 exemption.

How much tax does a business pay in Arizona? It depends on entity type and activity. A pass-through business pays Arizona's flat 2.5% on profit; a C-corporation pays 4.9%. On top of that, most active businesses also owe TPT (5.6% state plus local rates), payroll taxes if they have employees, and property tax on equipment above the exemption threshold.

What taxes do I pay on my LLC? If you're a member of a default (non-electing) LLC, your share of the LLC's profit is taxed at Arizona's flat 2.5% individual rate and, if you're active in the business, federal self-employment tax at 15.3%. If the LLC has elected S-corp taxation, your salary is subject to FICA instead of self-employment tax, and the remaining distribution avoids that layer.

How much is $100,000 of income taxed in Arizona? At the state level, $100,000 of Arizona taxable income is taxed at the flat 2.5% rate, roughly $2,500, regardless of entity type. Federal tax adds significantly more: self-employment tax of roughly $14,130 for a sole proprietor or single-member LLC (versus roughly $7,650 in FICA for an S-corp with a $50,000 reasonable salary), plus ordinary federal income tax on top in either case.

Does Arizona have a general state business license? No single statewide "business license" covers everything. Most businesses need a TPT license if they sell taxable goods or services, plus any city-specific business license required where they operate, plus industry-specific permits for regulated activities like contracting or childcare.

Do I need to register for TPT if I only sell online? It depends on where your customers are and how much you sell. Out-of-state sellers with no Arizona physical presence generally don't need a TPT license until they cross $100,000 in annual Arizona sales, the same threshold that applies to marketplace facilitators like Etsy or Amazon.