On November 9, 2023, Alabama Governor Kay Ivey signed into law a bill that beginning on January 1, 2024, will make compensation received by full-time hourly wage-paid employees for overtime work performed in excess of 40 hours in a workweek exempt from Alabama state income tax.
Quick Hits
- Alabama has enacted a law to make overtime compensation exempt from the state income tax.
- The new law will only apply to income for work performed on or after January 1, 2024, through June 29, 2025.
Under the new law, employers will be required to submit the following information to the Alabama Department of Revenue (ALDOR):
- For the tax year beginning January 1, 2023, the total amount of overtime pay received by full-time hourly wage-paid employees as compensation for work performed in excess of forty hours in a week and the total number of employees who received the compensation. Employers are required to provide this information to ALDOR no later than January 31, 2024.
- For the tax year beginning on or after January 1, 2024, and each tax year thereafter the total amount of overtime pay received by full-time hourly wage-paid employees as compensation for work performed in excess of forty hours in a week and the total number of employees who received the compensation. Employers are required to provide this information to ALDOR monthly, along with the Form A-6 withholding tax return, or quarterly, along with the Form A-1 withholding tax return, as applicable.
ALDOR has issued regulations pursuant to the new statute. The regulations clarify, among other things, that the new statute applies only to hourly wages paid for hours actually worked and that, therefore, any wages paid while an employee was on paid time off (PTO) or a holiday are not exempt from Alabama state income taxation under the new statute.
The regulations further clarify that the exemption does not apply to salaried employees; compensation not based on an hourly wage, such as mileage, comp time, or other, alternate methods of payment; and commissions and bonuses paid in addition to the hourly wage.
The new statute and regulation are temporary and will apply only to income received for work performed on or after January 1, 2024, and on or before June 29, 2025.
Next Steps
Employers may want to take note of these new changes and may want to consider reviewing their payroll policies in light of the new requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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