Employees who work overtime in Alabama are seeing a little more in their paycheck thanks to a new law that exempts their overtime pay from Alabama state income tax. This new law means employers are calculating gross wages differently when determining state tax withholdings for employee paychecks, as well as reporting new data to the state.
What we'll cover
What this new overtime law means for employers in Alabama
As of January 1, 2024, wages paid for overtime hours worked by non-exempt, hourly-paid employees in Alabama are not subject to state income tax. Employers are directed to reduce gross wages by the total amount earned for hours worked in excess of 40 within a workweek when calculating state income tax withholding for these employees.
With this law comes a new reporting requirement for Alabama employers. When submitting regular (monthly/quarterly) withholding tax reports to the Alabama Department of Revenue (ALDOR), employers must include:
- An aggregate total of all overtime paid during the reporting period
- The total number of hourly employees who received this pay
A one-time report of historical 2023 overtime data was also required to be submitted to the ALDOR by January 31, 2024. This exemption is set to expire on June 30, 2025, unless extended.
What employers using OnPay need to do
Nothing new. We've got you covered. Based on your payroll entries of employee hourly wages, we calculate your employee state income tax withholdings as directed by this new law. We include required overtime totals when filing your monthly/quarterly reports to the ALDOR on your behalf, and your 2023 totals were included in the January 31, 2024 one-time report.
When processing payroll in OnPay, be sure to verify all employee hours included in the run, ensuring hours are accurately entered, and checking for any payroll warnings before approving the pay run.
More information about this law on the Alabama Department of Revenue website→
FAQ
Does this exemption only apply to the overtime premium?
No. The exemption applies to hourly wages received for work performed in excess of 40 hours in a workweek, as defined by Alabama overtime law. The overtime premium is still used to calculate the employee's total wages, which are then reduced by the amount equal to the number of overtime hours worked, multiplied by 1.5x their regular rate of pay for the workweek.
Does this tax exemption apply to overtime pay for part-time or seasonal workers?
Yes. While the language in this law frequently references "full-time, hourly wage-paid employees", it goes on to clarify that this exemption applies to any employee working more than 40 hours in a workweek. This includes part-time and seasonal employees.
What if my company pays overtime starting after 35 hours in a week, or after eight hours in a day?
Companies with overtime policies that pay overtime hours before 40 hours are worked within in a week should not exempt this additional overtime pay from state tax withholding. Hours worked at or below 40 hours in a workweek should not be exempt from state tax, or included in required exemption reporting, under this law.
If an employee of an Alabama company works across state lines, would the exemption still apply?
Any wages earned in other states, and that are subject to that other state’s withholding tax laws, are not subject to Alabama withholding tax, and should not be exempt from state tax withholding due to any other state.
Will the overtime earned by full-time salaried nonexempt employees qualify for exemption?
No. Hybrid plans where an employee is salaried nonexempt, but can also earn overtime, will not qualify for the overtime exemption.