Assuming the 2.5% PTE election is automatically worth making. Arizona's flat individual income tax rate is also 2.5%, so the election is essentially rate-neutral at the state level — its only real value is the federal deduction. Owners make the election, then miss the four-installment estimated payment schedule and incur penalties for what turns out to be little or no state benefit. A second, quieter trap: individual shareholders can opt out of the election, which silently changes the entity's computation and the credits flowing to the other shareholders.
Recognized automaticallyPTET available
S-corp election in Arizona
In short
No general entity-level tax. Arizona corporate income tax (4.9%) reaches only income taxed at the federal corporate level. No franchise or net-worth tax.
Does Arizona recognize the federal S election?
Arizona automatically follows the federal S election; there is no separate Arizona election form. Any corporation taxed as an S corporation under Subchapter S must file Arizona Form 120S to meet the filing requirement of A.R.S. 43-1126, but no Arizona income tax is due from the S corporation itself even where the S corporation is subject to tax at the federal level. Income flows through to shareholders on Arizona Schedule K-1 and K-1(NR). Qualified subchapter S subsidiaries are not treated as separate entities and are included on the parent's single Form 120S.
Tax the entity still owes
Arizona has no franchise tax, no net-worth tax, and no minimum tax on S corporations. The 4.9% corporate rate applies only to S corp income subject to federal corporate-level tax (built-in gains, excess net passive income). The optional entity-level PTE tax is 2.5%. Transaction Privilege Tax (TPT) may apply depending on business activity. An annual report is required with the Arizona Corporation Commission.
Registering for payroll
Register with the Arizona Department of Revenue via AZTaxes.gov for an income tax withholding account, and with the Arizona Department of Economic Security (DES) for unemployment insurance. The employee completes Form A-4 to elect an Arizona withholding percentage of gross taxable wages. Withholding is reported quarterly on Form A1-QRT with an annual reconciliation on Form A1-R; UI is reported quarterly.
Annual filings
Form 120S is due on or before the 15th day of the third month following the close of the taxable year (March 15 for a calendar-year filer), or an extension must be requested. If the due date falls on a weekend or legal holiday the return is timely if postmarked the next business day (GTR 16-2). PTE estimated payments if electing. Quarterly A1-QRT withholding returns and an annual A1-R reconciliation. Quarterly DES unemployment reports. Annual report with the Arizona Corporation Commission.
Pass-through entity tax
Available for taxable years beginning after December 31, 2021. Rate is 2.5% of income attributable to resident shareholders plus Arizona-source income attributable to nonresident shareholders. The election is made ON Form 120S itself (a check box), not on a separate form, and must be made on a timely filed return. A distinctive Arizona feature: individual shareholders may OPT OUT of the entity's PTE election, and the computation on Form 120S separates opted-in resident and nonresident shareholders. Estimated PTE payments are due in four equal installments on the 15th day of the 4th, 6th and 9th months of the taxable year and the 15th day of the 1st month after year end; the required annual payment is the smaller of 90% of the current-year PTE liability or 100% of the prior-year tax. The 2025 Form 120S instructions reflect no sunset tied to the federal SALT cap.
The mistake owners make most often in Arizona
Filing your federal Form 2553
Businesses operating in Arizona send Form 2553 to the IRS Ogden service center — fax 855-214-7520. Full address and filing checklist for Arizona.
Frequently asked questions
Does Arizona require a separate S-corporation election?
No. Arizona does not require a separate state election. Arizona automatically follows the federal S election; there is no separate Arizona election form. Any corporation taxed as an S corporation under Subchapter S must file Arizona Form 120S to meet the filing requirement of A.R.S.
What tax does an S corporation pay in Arizona?
No general entity-level tax. Arizona corporate income tax (4.9%) reaches only income taxed at the federal corporate level. No franchise or net-worth tax.
Where do I file Form 2553 from Arizona?
With the IRS Ogden service center. Fax 855-214-7520, or mail to Department of the Treasury, Internal Revenue Service, Ogden, UT 84201.
What is the most common S-corp mistake in Arizona?
Assuming the 2.5% PTE election is automatically worth making. Arizona's flat individual income tax rate is also 2.5%, so the election is essentially rate-neutral at the state level — its only real value is the federal deduction. Owners make the election, then miss the four-installment estimated payment schedule and incur penalties for what turns out to be little or no state benefit. A second, quieter trap: individual shareholders can opt out of the election, which silently changes the entity's computation and the credits flowing to the other shareholders.
Compare with other states: Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia.
Sources
File your Form 2553 correctly
Scorply completes your federal election and includes a Arizona guide in your packet, so you know exactly what else you owe here.
Start my Form 2553Researched from official Arizona sources and verified July 30, 2026. State tax rules change. This is general information, not tax advice — confirm with the state or a CPA before you rely on it.