Alabama Overtime Tax Law: Tax Break for Employees, Required Reporting for Employers

Great news for your hard-working hourly staff and something to keep on your radar: A new Alabama overtime tax law benefits employees. Alabama’s 2024 overtime law exempts employees’ overtime earnings from the state’s income tax. 

Here’s a breakdown of what you as a business owner and employer need to know about this new benefit and required reporting.

What’s the Alabama overtime tax law? 

Effective January 1, 2024, overtime pay earned by hourly employees who have worked over 40 hours in a given workweek is exempt from Alabama state income tax. 

In simpler terms, let’s say an employee works 40 hours a week but puts in an extra four hours of overtime. Their earnings for the initial 40 hours are subject to Alabama state income tax. However, the earnings for those four hours of overtime are exempt from state income tax withholding. For your employees, this means more money in their take-home pay.

How long does the Alabama overtime income exemption last?

The Alabama income tax exemption for overtime pay is currently set to expire on June 30, 2025. 

The state income tax exemption applies to overtime received/paid on or after  January 1, 2024, and before June 30, 2025

Alabama lawmakers may choose to extend the benefit depending on its impact on the state revenue. 

What hours qualify for the overtime income exemption?

The Alabama overtime exemption applies to employees whose wages are subject to Alabama withholding for work over 40 hours in a given week.  

Alabama defines overtime pay for the exemption as compensation earned by a full-time hourly wage employee for work completed beyond 40 hours in a week. However, the ALDOR goes on to clarify any hourly part-time or seasonal employee qualifies for exempt overtime wages if they work over 40 hours in the week. Additionally, commissions and bonuses paid in addition to an hourly wage are not exempt. Mileage basis compensation is not covered under this legislation.

The Alabama Department of Revenue has stated only wages that are subject to Alabama withholding are considered when determining whether the 40-hour weekly threshold has been exceeded. This applies to both resident and non-resident employees. 

Does your company pay overtime for employees who work over eight hours a day? Keep in mind that the overtime income exemption only applies to wages for hours exceeding the 40-hour workweek. 

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Alabama overtime income exemption reporting requirements

The Alabama overtime tax law comes with new reporting requirements for employers who withhold Alabama tax from employee wages. 

Beginning in the 2024 tax year, employers must report the total amount of overtime paid and the number of employees who received overtime pay during the period to the Alabama Department of Revenue as monthly or quarterly reporting.  

Employers should report the total aggregate amount of overtime paid and the total number of employees who received overtime pay. 

Input the new data into the new field boxes on Form A-6 and A-1 withholding returns when filing through My Alabama Taxes. Alabama will not update paper forms with the new field boxes. Paper filers are encouraged to begin filing through My Alabama Taxes to comply with the new requirements. 

The ALDOR suggests reporting OT wages exempt from AL income tax on the employee Form W-2 in Box 14 using “EX OT WAGES” as the indicator: for example, EX OT WAGES- $15,250 for the year.

Guidelines for employers

While the new law does present challenges, employers can navigate the new overtime law regulations effectively and efficiently by staying informed and following the necessary steps.

To comply with the Alabama overtime tax law, follow these tips:

  • Identify affected employees
  • Review payroll practices and ensure wages for overtime hours subject to Alabama withholding are correctly exempt from state income tax OR invest in payroll software for accurate handling of the Alabama overtime pay exemption
  • Educate employees about the new law and keep communication open to prevent misunderstandings
  • Use time and attendance software for accurate tracking of employee hours and calculation of overtime hours worked
  • Report overtime pay on the My Alabama Taxes website
  • Keep informed on further updates from the Alabama Department of Revenue’s website

Need help keeping up with the new Alabama overtime tax law? Use Patriot’s Full Service payroll for accurate overtime calculations and Alabama reporting. Plus, our payroll integrates seamlessly with our time and attendance software add-on. Try it for free today!

This is not intended as legal advice; for more information, please click here.

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