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 received 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):

  1. 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.
  2. 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 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.

Ogletree Deakins’ Birmingham office will continue to monitor developments and will provide updates on the Alabama and Wage and Hour blogs.

Editor’s Note: This article was revised on January 3, 2024, to clarify that the Alabama overtime exemption law applies to overtime pay received by qualified employees from January 1, 2024, through June 29, 2025, even if the overtime pay relates to overtime hours worked before January 1, 2024.

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