The Arizona Department of Revenue has issued a ruling addressing the income tax withholding requirements for tip income. When the amount required to be withheld by an employer is more than the employee’s regular wage due to the requirement to withhold on tip income, Arizona recognizes the federal payment application priorities established by Treas. Reg. 31.3402(k)-1. The employer must first withhold federal and state taxes imposed on the regular wage, then use the remaining regular wage to satisfy the required federal withholding on the tip income, and finally use any remaining wage to satisfy the required Arizona withholding on the tip income. Thus, the employer is required to withhold Arizona taxes on tip income only to the extent the tax can be deducted and withheld from wages under the employer’s control. If the current wage under the employer’s control is not sufficient to satisfy the amount required to be withheld for Arizona purposes, then the employer must withhold the unsatisfied amounts from the remaining regular wage in the following or succeeding pay period(s) during the calendar year. This ruling supersedes Withholding Tax Ruling WTR 92-1. (Withholding Tax Ruling WTR 16-1, Arizona Department of Revenue, July 25, 2016.)
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