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New AZ Withholding structure result in a 5.9% increase in SWT deductions

Tuesday, July 13, 2010

As all employers and most employees are now aware, effective July 1, 2010 the state of Arizona has changed how state withholding (SWT) taxes are calculated. For many years the SWT was based on a rate that each employee elected as a percentage of the employee’s Federal Withholding Tax (FWT). Employees could have elected a high percentage rate for SWT so that they did not come up short when they filed their annual tax return but if their FWT deduction was low (FWT is calculated using tables and is based on the gross pay amount, marital status, exemptions and pay frequency), they might have had little or no SWT deducted from their paycheck.   The new SWT calculation is based directly on Gross Wages not FWT, so employees that have elected a rate other than zero will now see State Withholding on their check where they may not have in the past.

The figures are based on a sampling of 225 AZ based companies of varying size and approximately 7,000 employees and 23,440 paychecks. They include non-exempt (hourly) and exempt (salaried) employees and both white and blue collar employees (professional law firms as well as manufacturing).
Here is what we found:

1.   Overall the paycheck SWT has increased by approximately 5.9%

2.   For employees with gross pay up to $500.00 the SWT rate went up 504% from 0.4% to 2.04% (most employees had no SWT under the old percentages and most had SWT under the new).

3.   For employees with gross pay from $500.01 to 1500.00 the SWT rate went up 106% from 1.31% to 2.69%

4.   For employees with gross pay from $1500.01 to 3000.00 the SWT rate went up 117% from 2.66% to 3.10%

5.   For employees with gross pay from 3000.01 – 10,000.00 the SWT rate went down 20% from 4.15% to 3.36%.

Conclusion: I wasn’t able to find the exact 2009 SWT figure but at an estimated $3bb the net increase would be $117mm. Those most impacted are low wage earnings, most of which had little or no SWT deducted under the old method almost all have some deductions under the new rule. The increases are lower as the wages go up until you see a slight decrease for the highest wage earners.
The overall increase against claims that the state will be issuing I.O.U’s for 2010 refunds paints an interesting picture?

Jason Roth, President, Payroll Experts LLC ..

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