Every paycheck in Arizona has two main layers of tax: federal and state. At the federal level, income is taxed progressively, with rates climbing from 10% to 37% as earnings increase. Arizona takes a different approach, applying a flat 2.5% state income tax to all taxable income in 2025. For employees, the contrast between these systems affects how much is withheld, how deductions apply, and what you actually take home. This guide explains the key differences, provides real paycheck examples, and highlights what matters most for workers in Arizona.
Quick Answer: Federal vs Arizona Income Tax
- Federal income tax is progressive, with brackets ranging from 10% to 37%. The rate you pay rises as your income increases.
- Arizona state income tax is a flat 2.5%, applied equally to all taxable income in 2025.
This means your paycheck is shaped by two different systems: a tiered federal structure and a simple state flat rate.
How Federal Income Tax Works for Employees
Progressive Brackets
The IRS uses seven tax brackets, from 10% to 37%. You don’t pay one rate on your whole income; instead, different portions are taxed at different rates. For example:
- First $11,600 (single filer) taxed at 10%
- Next portion taxed at 12%
- Higher portions taxed at 22%, 24%, and so on up to 37%
Standard Deduction
Federal taxable income is reduced by the standard deduction ($15,000 for single filers in 2025; $30,000 for married couples).
Additional Federal Taxes
Besides income tax, employees also see FICA taxes for Social Security (6.2%) and Medicare (1.45%), withheld separately.
➡ For a more detailed breakdown of your deductions, check the Arizona paycheck deductions calculator.
How Arizona State Income Tax Works
Flat 2.5% Rate
Since 2023, Arizona applies a single flat 2.5% rate to all taxable income. Whether you earn $40,000 or $400,000, the same percentage applies.
Filing Thresholds
You must file an Arizona return if your gross income exceeds:
- $13,850 (single)
- $27,700 (married, joint)
- $20,800 (head of household)
Exemptions and Deductions
- Social Security benefits: not taxed in Arizona
- Military income: active duty and retirement fully exempt
- Public pensions: first $2,500 exempt
- Long-term capital gains: 25% deduction, lowering effective rate to 1.875%
Paycheck Impact: Side-by-Side Example
| Income | Federal Income Tax* | Arizona Tax (2.5%) | Total Income Tax | Notes |
|---|---|---|---|---|
| $50,000 | ~$4,300 | $1,250 | ~$5,550 | Standard deduction applied |
| $100,000 | ~$13,700 | $2,500 | ~$16,200 | Progressive federal tax adds weight |
| $200,000 | ~$36,000 | $5,000 | ~$41,000 | Federal top brackets dominate |
*Federal tax amounts are illustrative and assume single filer with standard deduction.
➡ If you want to see how benefits and pre-tax contributions change your take-home pay, use the take-home pay calculator with benefits.
Key Differences Employees Should Know
- Structure: Federal is tiered; Arizona is flat.
- Complexity: Federal rules involve multiple brackets, credits, and deductions; Arizona’s system is straightforward.
- Fairness: Federal system adjusts by income level; Arizona’s applies equally, but critics argue it favors higher earners.
- Interaction: Arizona tax paid can be included in your federal SALT deduction, but that’s capped at $10,000 per year.
- Budget Impact: Federal revenue funds national programs; Arizona’s flat tax has reduced state collections, affecting budgets.
FAQs: Federal vs Arizona Income Tax
Q: What’s the federal income tax rate in 2025?
A: Between 10% and 37%, depending on your income bracket.
Q: What’s the Arizona income tax rate in 2025?
A: A flat 2.5% of taxable income.
Q: Are Social Security benefits taxed in Arizona?
A: No, they are exempt from state income tax.
Q: Can I deduct Arizona state taxes on my federal return?
A: Yes, but the deduction is capped at $10,000 under the SALT limit.
Q: How does Arizona’s flat tax affect employees compared to federal tax?
A: It keeps paycheck calculations simpler, but federal withholding usually takes the bigger share.
Harry is the creator of ArizonaPaycheckCalculator.com, a trusted resource for accurate and easy-to-use payroll and tax calculators. With a focus on clarity and precision, Harry helps Arizona residents understand their take-home pay, deductions, and withholdings. Dedicated to making complex calculations simple, he combines financial knowledge with user-friendly tools to save users time and confusion.