Alabama overtime tax exemption ended June 30, 2025
Alabama employers must resume state income tax withholdings on all overtime wages paid on or after July 1, 2025. Even if overtime is earned on or before June 30, if the overtime pay is received on or after July 1, it does not qualify for the overtime tax exemption.
More information→
What employers using OnPay need to do
Nothing new. We've got you covered. Based on your payroll entries of employee hourly wages, we've been calculating your employee state income tax withholdings as directed by this temporary law, and we'll automatically resume state income tax withholding for overtime wages paid on or after July 1, 2025.
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→
What this temporary overtime law meant for employers in Alabama
For the period starting January 1, 2024, and ending June 30, 2025, wages paid for overtime hours worked by non-exempt, hourly-paid employees in Alabama were not subject to state income tax. Employers were 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.
This overtime tax exemption expired on June 30, 2025, and was not extended by the state.
FAQ
Does an amount of overtime earned on or before June 30, 2025, but paid after this date qualify for exemption?
No, overtime pay must be effectively received by the employee on or prior to June 30, 2025, to qualify for the exemption.
Did 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 owed to any other state.
Will the overtime earned by full-time salaried nonexempt employees qualify for exemption?
No. Hybrid plans, where a salaried, non-exempt employee can also earn overtime, did not qualify for the overtime exemption.
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