Arizona Business Taxes for LLCs
What taxes does an Arizona LLC pay? Learn about state income tax, Transaction Privilege Tax, self-employment tax, payroll tax, and local business license requirements.
Bizee Editorial Staff
Editorial Team
Arizona LLC tax snapshot
Filing fee: $50 (Articles of Organization)
Processing time: 14–16 business days standard; expedited options available
State agency: Arizona Corporation Commission
Annual report due: Arizona LLCs file an Annual Report with the Arizona Corporation Commission. Due date varies by LLC formation date.
State tax rate: Arizona flat income tax rate: 2.5% (2024). Transaction Privilege Tax (TPT) base rate: 5.6%. No state franchise tax on LLCs.
How Arizona taxes your LLC
Arizona LLCs don't pay income tax at the business level. Instead, profits pass through to the owners, who report them on their personal returns and pay Arizona state income tax, federal income tax, and self-employment tax. Depending on what your LLC sells and where it operates, you may also owe Transaction Privilege Tax and local business taxes.
Arizona eliminated its graduated income tax brackets in 2023 and now taxes individual income at a flat 2.5% rate — one of the lowest flat rates in the country. That simplifies the math for most LLC owners, but it doesn't reduce the number of tax types you need to track.
- Arizona state income tax on LLC profits (flat 2.5% rate)
- Federal income tax on LLC profits (pass-through)
- Self-employment tax on net earnings (15.3% federal rate)
- Transaction Privilege Tax if your LLC sells taxable goods or services
- Payroll taxes if your LLC has employees
- Local city or county business taxes and license fees depending on where you operate
Arizona state income tax
Arizona taxes LLC income at the owner level, not the business level. Profits pass through to each member's personal Arizona income tax return, where they're taxed at the state's flat 2.5% rate. There's no separate Arizona corporate income tax for standard LLCs, and Arizona doesn't impose a franchise tax on LLCs.
If your LLC has multiple members, Arizona requires the LLC to withhold and remit state income tax on behalf of any nonresident members. Resident members report their share of LLC income on their individual Arizona returns using Form 140.
Arizona also has a Small Business Income Tax return (Form 140-SBI) that allows eligible small business owners to elect a separate tax rate on business income. A tax professional can help you figure out whether that election makes sense for your situation.
Transaction Privilege Tax
Arizona's Transaction Privilege Tax — commonly called TPT — is the state's version of a sales tax, but it works differently. TPT is a tax on the privilege of doing business in Arizona, not technically on the buyer. Your LLC collects it from customers and remits it to the Arizona Department of Revenue. The state base rate is 5.6%, but cities add their own rates on top, so the combined rate varies by location.
If your LLC sells taxable goods or services, you need to register for a TPT license with the Arizona Department of Revenue before you start collecting. Filing frequency — monthly, quarterly, or annually — depends on your expected tax liability. Most new businesses start on a monthly schedule.
The TPT catches people off guard because it applies to more than retail sales. Services like contracting, restaurants, and rentals all have their own TPT classifications. Check the Arizona Department of Revenue's TPT classification guide to confirm whether your LLC's activities are taxable.
Federal taxes for Arizona LLC owners
Arizona LLC owners pay federal income tax and self-employment tax on their share of business profits. Both are pass-through taxes — the LLC itself doesn't file a federal income tax return unless it elects to be taxed as a corporation. Single-member LLCs report on Schedule C; multi-member LLCs file a partnership return (Form 1065) and issue K-1s to each member.
Self-employment tax covers Social Security and Medicare contributions. The rate is 15.3% on net earnings up to the Social Security wage base, then 2.9% on earnings above that threshold. You can deduct half of the self-employment tax you pay when calculating your federal adjusted gross income.
Most LLC owners need to pay estimated taxes quarterly — both federal and Arizona state — rather than waiting until the annual filing deadline. Missing quarterly payments can mean underpayment penalties. A tax professional can help you figure out the right payment schedule for your income level.
Payroll and employer taxes
If your Arizona LLC has employees, you take on a separate set of tax obligations. You need to register with the Arizona Department of Revenue for payroll withholding, withhold Arizona state income tax from employee wages, and remit those amounts on a schedule set by the department. Arizona's minimum wage is $15.15 per hour as of January 1, 2026.
On the federal side, you're responsible for withholding federal income tax, Social Security tax, and Medicare tax from each employee's paycheck. You also pay the employer's share of Social Security and Medicare — 7.65% of each employee's wages. Federal unemployment tax (FUTA) and Arizona unemployment insurance (UI) contributions apply as well.
Payroll tax obligations add up fast, and getting them wrong can mean back taxes, penalties, and interest. If you're hiring your first employee, talk to a tax professional before the first paycheck goes out.
Local business taxes and licenses
Arizona cities and counties layer their own taxes and license requirements on top of state obligations. Where your LLC operates determines what you owe locally — and some cities have requirements that catch business owners off guard.
Phoenix
Phoenix imposes a city privilege tax on businesses operating within city limits. The rate varies by business classification. Most LLCs doing business in Phoenix need a city business license and must file city TPT returns separately from the state return.
Tucson
Tucson requires a business license for LLCs operating in the city. The city also imposes a privilege tax on gross income from business activities conducted within Tucson. You can apply for a Tucson business license through the city's Business Services Department.
Mesa
Mesa requires a business license for LLCs, with privilege license tax fees that vary by business type and location. You can apply through the Mesa Business Development office.
Unincorporated county areas
If your LLC operates outside city limits in Pima County, you may need a county business license and may owe county Transaction Privilege Tax on applicable business activities.
Frequently asked questions
Arizona LLCs are taxed as pass-through entities by default. The LLC itself doesn't pay state income tax. Instead, profits pass through to the owners, who report their share on personal Arizona returns and pay the state's flat 2.5% income tax rate. Depending on the LLC's activities, Transaction Privilege Tax and local business taxes may also apply.
No. Arizona does not impose a franchise tax on LLCs. The Transaction Privilege Tax is sometimes called a franchise tax in casual conversation, but it's a tax on business activity — not a flat annual fee for the privilege of existing as an LLC. Standard Arizona LLCs don't owe any annual franchise-style tax to the state.
Yes. Arizona's equivalent of a sales tax is the Transaction Privilege Tax (TPT). The state base rate is 5.6%, but cities add their own rates, so the combined rate varies by location. If your LLC sells taxable goods or services, you need to register for a TPT license with the Arizona Department of Revenue before collecting from customers.
It depends on your income, business type, and location. At the state level, LLC owners pay Arizona income tax at a flat 2.5% rate on their share of profits. At the federal level, self-employment tax runs 15.3% on net earnings up to the Social Security wage base. Add Transaction Privilege Tax if applicable, plus any local city or county taxes. A tax professional can help you figure out your total liability.
It's an optional separate tax return — Form 140-SBI — that allows eligible Arizona small business owners to elect a different tax rate on their business income, separate from their personal income. Not every LLC owner benefits from the election. Talk to a tax professional to figure out whether filing Form 140-SBI makes sense for your situation.
Yes, in most cases. If you expect to owe more than $1,000 in Arizona income tax for the year, you need to make quarterly estimated tax payments to the Arizona Department of Revenue. The same quarterly payment requirement applies at the federal level. Missing payments can mean underpayment penalties on top of the tax you owe.
Arizona businesses typically pay state income tax on profits, Transaction Privilege Tax on taxable sales or services, and federal income and self-employment taxes. LLCs with employees also owe payroll taxes — both state withholding and federal employment taxes. Local cities and counties may add business license fees and city privilege taxes depending on where the business operates.
