R15-2D-701 General A.

The payroll factor, as defined in A.R.S. § 43-1143, for each trade or business of a taxpayer includes the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the tax period. 1. The total amount “paid” to employees is determined upon the basis of the taxpayer’s accounting method. a. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued is deemed to have been paid. b. Notwithstanding the taxpayer’s method of account- ing, compensation paid to employees may, at the election of the taxpayer, be included in the payroll factor by use of the cash method if the taxpayer is required to report the compensation under that method for unemployment compensation purposes. 2. The compensation of any employee for activities that are connected with the production of nonbusiness income is excluded from the payroll factor. Example 1: The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of the tax- payer’s trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of those wages is included in the payroll factor. Example 2: The taxpayer owns various securities that it holds as an investment separate and apart from its trade or business. The management of the taxpayer’s investment portfolio is the only duty of Mr. X, an employee. The salary paid to Mr. X is excluded from the payroll factor. 3. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded from the payroll factor. 4. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services, provided that the amounts constitute income to the recipient under the January $2,000 July $15,000 February $2,000 August $17,000 March $3,000 September $23,000 April $3,500 October $25,000 May $4,500 November $13,000 June $10,000 December $2,000 Subtotal $25,000 Subtotal $95,000 Total $120,000 Internal Revenue Code. In the case of employees not sub- ject to the Internal Revenue Code, such as those employed in foreign countries, the determination of whether benefits or services would constitute income to the employees shall be made as though the employees were subject to the Internal Revenue Code. B. Generally, a person is considered to be an employee if the per- son is treated by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contribu- tions Act. However, because certain individuals are included within the term “employees” in the Federal Insurance Contri- butions Act who are not employees under the usual common- law rules, a taxpayer may establish that a person who is treated as an employee for purposes of the Federal Insurance Contri- butions Act is not an employee for purposes of this Section. Historical Note Recodified at 6 A.A.R. 2308, filed in the Office of the Secretary of State June 2, 2000 (Supp. 00-2). Amended by final rulemaking at 7 A.A.R. 4973, effective October 5, 2001 (Supp. 01-4).