Arizona Income Tax Rate: The Flat 2.5% Rate and What It Means for Business Owners
Arizona Income Tax Rate: The Flat 2.5% Rate and What It Means for Business Owners
If you are forming a business in Arizona, the state income tax rate is one of the first numbers to pin down. The short answer: individuals pay a flat 2.5% on Arizona taxable income, and C corporations pay 4.9% of net income with a $50 minimum. Those two numbers cover most of what Arizona charges on business profit. The details are where owners get caught: how pass-through businesses are taxed, what counts as Arizona income, and which other taxes sit outside the income tax entirely.
This guide is informational content, not legal or tax advice. Your tax treatment depends on your entity type, your federal classification, where you earn income and your personal situation. Talk with a qualified CPA or tax attorney before you make an entity or tax decision.
The Arizona individual income tax rate is a flat 2.5%
According to the Arizona Department of Revenue (ADOR), Arizona levies a flat 2.5% rate on Arizona taxable income for all income levels and filing statuses, for tax year 2023 and beyond. The rate applies to the whole of your taxable income, not just the portion above a threshold. A single rate applies whether you earn $30,000 or $300,000.
The rate is the same regardless of how you earn the money. Profit from a sole proprietorship, a partnership share, an LLC or an S corporation is taxed at the same 2.5% as a salary. Arizona does not charge a higher individual rate on business income than on wages.
A simplified example: if your Arizona taxable income is $100,000, the state income tax before any credits is $2,500 (100,000 x 0.025). Your actual figure starts from your federal numbers and then goes through Arizona adjustments, so expect it to differ from a back-of-the-envelope calculation.
Is Arizona a flat tax state? For individual income tax, yes. The Arizona flat tax is the single-rate individual income tax described above. It does not replace sales tax, property tax or the Transaction Privilege Tax, which are covered later in this guide.
The Arizona corporate income tax: 4.9% with a $50 minimum
A corporation doing business in Arizona and taxed as a C corporation pays Arizona corporate income tax at 4.9% of net income or $50, whichever is greater, under A.R.S. 43-1111. Arizona has no corporate franchise tax based on net worth, so the tax follows profit rather than the value of the company's assets or equity.
Two examples show how the rule works, before credits and other adjustments:
- A corporation with $200,000 in net income owes $9,800 (200,000 x 0.049).
- A corporation with $500 in net income would owe $24.50 at 4.9%, so the $50 minimum applies instead.
Confirm with ADOR how the minimum applies in a year when the corporation shows a loss. Do not assume the outcome from the general rule alone.
Corporations also file an Annual Report with the Arizona Corporation Commission. For a for-profit corporation the fee is $45, due each year in the corporation's anniversary month on the date the Commission assigns. A corporation may request a written extension of up to six months, filed on or before the due date. Nonprofit corporations pay $10 instead. This is a filing fee, separate from the income tax.
Pass-through owners: how sole proprietors, partners, LLC members and S corporation shareholders are taxed
Most small Arizona businesses are pass-through entities. The business generally does not pay the income tax itself. The profit flows to the owners, who report it on their individual Arizona return at 2.5%. This covers:
- Sole proprietors reporting business profit on their own return
- Partners reporting their share of partnership income
- Members of an LLC that is taxed as a pass-through
- Shareholders of an S corporation
For an LLC, Arizona levies no LLC franchise tax and charges no annual report fee at the Corporation Commission. The LLC's recurring state filing cost is zero. The initial Articles of Organization filing fee is $50, and expedited review costs $35 more. Income still flows to the members and is taxed at 2.5%.
Arizona starts from federal figures, so how your business is classified for federal purposes usually determines how profit reaches your Arizona return. A CPA can confirm how your specific structure flows through.
Common mistakes business owners make with the pass-through rule
The most frequent mistake is assuming a pass-through avoids Arizona tax. It does not. Profit allocated to you is taxed at 2.5% on your individual return, generally whether or not you withdraw the cash from the business.
The second mistake is applying the 4.9% corporate rate to an LLC by default. An LLC that elects corporate treatment does pay the corporate income tax of 4.9% of net income or $50, whichever is greater. An LLC that stays with pass-through treatment does not. The election is made federally, so review it with your CPA before the tax year starts.
The third mistake is treating Arizona as a place where a single-state return settles everything. If you live in another state but hold an interest in a business earning income here, you may have an Arizona filing obligation. That leads to the nonresident rules below.
The pass-through entity election
Partnerships and S corporations may elect to have the entity itself pay tax at the entity level rather than passing income through to owners. Under A.R.S. 43-1014, this election applies for tax years after 2021, and the pass-through entity election is taxed at 2.5%.
This is a planning decision, not an automatic setting. It changes who pays the tax and how it is reported, and it can interact with how each owner's own return is filed. Check the election's requirements, deadlines and fit with ADOR and a CPA before you elect.
Nonresidents and Arizona-source income
Arizona taxes residents on their income and taxes nonresidents on income from Arizona sources. If you live in another state but own a share of a business that earns income in Arizona, that share may be taxable here at the same 2.5% rate.
Determining what counts as Arizona-source income can be complicated for multistate businesses, especially when services are performed partly in Arizona and partly elsewhere. Confirm your filing obligations with ADOR and a tax professional who handles multistate returns.
No city or county income tax
Arizona has no city or county income tax. Some states, Ohio among them, let cities levy an income tax on top of the state rate, so the combined rate can depend on where a business sits. In Arizona, the state rate is the only income tax on business profit.
Cities and counties still raise revenue and set rules through other taxes, fees and licensing, so local requirements matter. Those are covered below.
Taxes that sit outside the income tax
The 2.5% rate covers income tax only. Arizona businesses deal with three other categories that have their own rules and their own agencies:
- Transaction Privilege Tax (TPT): Arizona's transaction tax, administered by ADOR. It applies to retail sales and other taxable business classifications. Arizona's combined state rate on retail and most other taxable classifications is 5.6%, and county and city rates apply on top of that.
- Withholding: If you have employees, you withhold state income tax from their wages. That is an employer obligation separate from your own 2.5% liability. Check with ADOR for current withholding rules and filing schedules.
- Payroll taxes: Employer payroll obligations are separate from the income tax. Confirm current state and federal requirements with the relevant agencies.
Business licensing: the TPT license is a tax license, not a general license
Arizona issues no general statewide business license. The license most businesses actually need is the TPT license from ADOR, which costs $12 per location. It is a tax registration, not a permit to operate. Apply through the ADOR TPT license page.
Local requirements sit on top of the state layer:
- Cities and towns commonly require their own business license or local TPT license. Check with the clerk of the city or town where you operate.
- Counties issue no general business license.
- Regulated professions need licensing from their own boards. Contractors are licensed by the Registrar of Contractors, so confirm your license class and requirements with that agency before you bid work.
Keep the tax registration and the entity filing separate in your records. The Corporation Commission handles entity documents for LLCs and corporations. Trade name registration is optional in Arizona and is filed with the Secretary of State, Business Services Division, through the Secretary of State trade name page.
Entity comparison: how each structure is taxed
| Structure | How Arizona taxes profit | Rate | Recurring state filing |
|---|---|---|---|
| Sole proprietorship | Reported on the owner's individual return | 2.5% | No Corporation Commission entity filing |
| LLC (pass-through) | Flows to members' individual returns | 2.5% | None, since LLCs file no annual report |
| S corporation | Flows to shareholders, or entity-level election | 2.5% | $45 annual report |
| C corporation | Taxed at the corporation level | 4.9% of net income, $50 minimum | $45 annual report |
The table shows the default treatment. Elections and the specifics of your federal classification can change the result, so confirm the outcome for your structure.
Nonresident and multistate caution
Owners who move, relocate part of their work, or invest in an Arizona business from another state should review the Arizona-source rules before the tax year closes. The income tax rate is simple. Determining which income is Arizona income is not.
What to verify before you file
- Confirm your entity type and federal classification with a CPA.
- Decide whether the pass-through entity election fits your owners and check its requirements with ADOR.
- Confirm whether your activities require a TPT license at azdor.gov.
- Check with your city or town for a local business license or local TPT license.
- Confirm entity filings and any Annual Report deadline through the Arizona Corporation Commission and the Arizona Business Center.
- If you operate under a name other than your legal name, decide whether to register a trade name with the Secretary of State.
Will the rate change?
As of our research, the individual rate is still 2.5% for 2026. Several 2026 session bills, including HB 2918, SB 1318 and HB 2636, proposed changes, and none were found enacted. Tax law can change between sessions, so treat the rate as current only as of the date you read this. Check azdor.gov for any 2027 changes before you plan your next tax year.
Next steps
Use the 2.5% individual rate and the 4.9% corporate rate in your planning, then confirm both with ADOR and your CPA. The mistakes that cost money are rarely the headline rate. They come from misreading pass-through treatment, skipping the $50 minimum in a low-profit year, and overlooking nonresident and local obligations.
Official sources
- Arizona Department of Revenue: https://azdor.gov/
- TPT license: https://azdor.gov/business/transaction-privilege-tax/tpt-license
- Arizona Corporation Commission, Corporations Division: https://azcc.gov/corporations
- Arizona Business Center: https://arizonabusinesscenter.azcc.gov/
- Business entity search: https://arizonabusinesscenter.azcc.gov/businesssearch
- Trade name registration, Secretary of State: https://azsos.gov/business/tntm
This guide is informational content, not legal or tax advice. Consult a qualified CPA or tax attorney for decisions about your entity, elections and filing obligations.