Alabama has amended the provision which exempts overtime pay earned by employees from state taxation. The amended law is effective on October 1, 2024.
The Details:
In June of 2023, Alabama enacted House Bill 217 (HB 217), which amended Alabama Code §40-18-14 to exclude from gross income for state income tax purposes amounts received by a full-time hourly wage-paid employee as compensation for work performed in excess of 40 hours in a week.
The exemption provided under HB 217 is in effect for tax years that begin after December 31, 2023, and end prior to June 30, 2025.
However, the tax exemption under HB 217 was only provided to "hourly” employees and did not extend to non-exempt employees paid on a different basis (ex. salaried, commissioned, piece rate etc.) when working more than 40 hours in a workweek.
Amendment to Overtime Tax Exemption Provision:
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Current Law - HB 217
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Amended Law – HB 407
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Gross income does not include the following items which shall be exempt from income tax under this chapter:.. 1. Amounts received by a full-time hourly waged paid employee as compensation for work performed in excess of 40 hours in a week.”
For the tax year beginning on or after January 1, 2024, through June 30 , 2025, each employer must submit to the Department of Revenue (DOR) the total amount received by full-time hourly wage-paid employees as compensation for work performed in excess of 40 hours in a week.
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Gross income does not include the following items which shall be exempt from income tax under this chapter:.. Amounts paid as overtime compensation in accordance with the U.S. Fair Labor Standards Act.”
For the tax year beginning on or after January 1, 2024, through September 30, 2024, each employer must submit to the Department of Revenue (DOR) the total amount received by full-time hourly wage-paid employees as compensation for work performed in excess of 40 hours in a week.
Effective October 1, 2024, through June 30, 2025, each employer must submit to the DOR the total amounts received for Fair Labor Standards Act (FLSA) overtime wages and the total number of employees.
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Consequently, effective October 1, 2024, overtime wages earned by all FLSA non-exempt employees (including but not limited to hourly non-exempt employees) for working more than 40 hours in a workweek will not be subject to Alabama state income. This tax exemption is in effect through June 30, 2025.
Note that for employers governed by the National Railway Labor Act, the income tax exemption applies to the hourly component overtime compensation as defined in applicable collective bargaining agreements.
Next Steps:
Effective, October 1, 2024, through June 30, 2025, employers should not withhold Alabama state income tax for FLSA overtime wages paid to all non-exempt employees.
ADP will automatically exclude overtime wages, paid using the Overtime field on the Payroll Worksheet in Workforce Now, from Alabama SIT for your organization’s employees coded to Alabama for State Income Tax withholding.
Have Questions?
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