How Arizona Taxes LLCs in 2025
Arizona offers one of the simplest and most favorable LLC tax environments in the United States. As of 2025, Arizona imposes a flat 2.5% individual income tax rate on all taxable income, regardless of the amount earned. This flat rate, reduced from the previous graduated structure, makes tax planning straightforward for LLC owners.
Arizona does not impose any entity-level tax on LLCs that are taxed as pass-through entities. LLC income flows through to the members' personal tax returns and is taxed at the flat 2.5% rate. This is one of the lowest flat rates in the nation.
Key Benefit: Arizona's 2.5% flat tax rate is among the lowest in the country for states that impose an income tax. Combined with no entity-level LLC fees and $0 annual reports, Arizona is highly attractive for LLC owners.
Arizona LLC Annual Requirements
Arizona LLCs enjoy minimal annual compliance costs:
- Annual Report: Arizona does not require LLCs to file an annual report. This saves both time and money compared to most other states.
- No franchise tax: Arizona does not impose a franchise tax or business privilege tax on LLCs.
- No entity-level tax: Pass-through LLCs pay no separate state entity tax.
- Transaction Privilege Tax (TPT): Businesses selling tangible goods or certain services must obtain a TPT license and collect sales tax.
Arizona's 2.5% Flat Tax Rate
Arizona completed its transition to a flat income tax in 2023, consolidating its previous graduated brackets into a single 2.5% flat rate. This applies to all taxable income for all filing statuses. The standard deductions for Arizona are:
| Filing Status | Standard Deduction | Tax Rate |
|---|---|---|
| Single | $14,600 | 2.5% |
| Married Filing Jointly | $29,200 | 2.5% |
| Married Filing Separately | $14,600 | 2.5% |
| Head of Household | $21,900 | 2.5% |
Federal Taxes for Arizona LLCs
Like all US LLC owners, Arizona LLC members are responsible for federal taxes:
- Self-Employment Tax (15.3%): Social Security tax (12.4%) on income up to $176,100 and Medicare tax (2.9%) on all income. An additional 0.9% Medicare surtax applies to income exceeding $200,000 (single) or $250,000 (married filing jointly).
- Federal Income Tax: Ranges from 10% to 37% based on your total taxable income and filing status.
- QBI Deduction: Eligible LLCs can deduct up to 20% of qualified business income under IRC Section 199A.
Tax Savings: An Arizona LLC owner earning $100,000 in net income pays approximately $2,135 in state income tax (after the standard deduction). Compare this to California at roughly $6,000-$8,000 or New York at $5,000-$6,500 for the same income level.
Arizona Transaction Privilege Tax (Sales Tax)
Arizona's sales tax system, called the Transaction Privilege Tax (TPT), is unique because it is levied on the seller (not the buyer, although sellers typically pass the cost to consumers). Key details:
- State TPT rate: 5.6%
- County and city taxes: Additional 0.25% to 5.6% depending on jurisdiction
- Average combined rate: Approximately 8.4%
- Phoenix combined rate: 8.6%
- Tucson combined rate: 8.7%
- TPT license: Free to obtain from the Arizona Department of Revenue
Arizona LLC Formation Costs
- Articles of Organization: $50 (online filing)
- Annual Report: Not required ($0)
- Publication requirement: Arizona requires LLCs to publish a notice of formation in an approved newspaper for three consecutive publications. Cost varies by county ($40-$300).
- Statutory Agent: Required; can be a member, or a registered agent service ($100-$300/year).
Arizona Pass-Through Entity Tax (PTET) Election
Arizona offers a Pass-Through Entity Tax (PTET) election that allows LLCs to pay state income tax at the entity level. This was designed as a workaround for the federal $10,000 SALT deduction cap. Key points:
- The election is made annually on a timely filed return
- The tax is imposed at the individual rate of 2.5% on the entity's taxable income
- Members receive a corresponding credit on their individual returns
- This effectively allows the LLC to deduct state taxes as a business expense for federal purposes
Arizona Employment Taxes
If your Arizona LLC has employees, additional tax obligations include:
- Unemployment Insurance (UI): 0.08% to 20.6% on the first $8,000 of wages per employee (new employer rate: 2.0%)
- Workers' Compensation: Required for most employers; rates vary by classification
- Job Training Tax: 0.1% on the UI taxable wage base
Arizona LLC vs. Other Low-Tax States
| State | Income Tax Rate | Sales Tax | LLC Annual Fee | Filing Fee |
|---|---|---|---|---|
| Arizona | 2.5% flat | 5.6% + local | $0 | $50 |
| Colorado | 4.4% flat | 2.9% + local | $10 | $50 |
| Utah | 4.65% flat | 6.1% | $20 | $54 |
| North Carolina | 4.5% flat | 4.75% | $200 | $125 |
| Indiana | 3.05% flat | 7% | $30 biennial | $95 |
| Pennsylvania | 3.07% flat | 6% | $70 | $125 |
Filing Deadlines for Arizona LLCs
- Arizona individual return (Form 140): April 15
- Multi-member LLC (Form 165): March 15 (partnership return)
- Extension: Automatic 6-month extension with Form 204
- Estimated tax payments: Due April 15, June 15, September 15, January 15 if you expect to owe $1,000 or more
- TPT returns: Monthly, quarterly, or annually depending on volume
Common Mistakes Arizona LLC Owners Make
- Skipping the publication requirement: Arizona requires newspaper publication after formation. Failure to publish does not dissolve your LLC but can create issues.
- Forgetting TPT obligations: If you sell taxable goods or services, you must register for and collect TPT even as a small LLC.
- Not considering the PTET election: The pass-through entity tax election can save significant money if you itemize deductions federally and are affected by the $10,000 SALT cap.
- Using Arizona nexus without registration: Out-of-state businesses with Arizona customers may have nexus and owe TPT.
- Neglecting city-level business licenses: Many Arizona cities require separate business licenses beyond the state TPT license.
Tax Deductions for Arizona LLC Owners
- Arizona standard or itemized deductions: Arizona conforms to many federal deductions but has its own standard deduction amounts
- Qualified Business Income (QBI) deduction: 20% of qualifying income under Section 199A
- Self-employment tax deduction: 50% of SE tax as an above-the-line deduction
- Home office deduction: For LLC owners working from home
- Vehicle and travel expenses: Business use of vehicle at 70 cents/mile (2025)
- Health insurance premiums: Self-employed health insurance deduction
- Retirement plan contributions: SEP IRA, Solo 401(k), or SIMPLE IRA