Quick Hits

• Under the amendment, the Alabama overtime income tax exemption will be based on overtime paid in accordance with the FLSA. For employers governed by the National Railway Labor Act, the exemption will be based on overtime paid as stated in relevant collective bargaining agreements.
• The amendment applies from October 1, 2024, until June 30, 2025.

As many employers have recently learned, Alabama law exempts overtime payments from state income tax. In the original legislation, the exempt overtime was defined as compensation received by full-time hourly wage-paid employees for overtime work performed in excess of forty hours in a workweek. This definition resulted in a number of questions, such as, for example, whether overtime rates calculated based on both overtime hours and commission earnings are fully exempt from Alabama state income tax.

The new amendment resolves many of these questions by matching the state exemption definition of “overtime” to the FLSA’s definition. As such, the exempt overtime pay shall be based on the employee’s overtime computed in accordance with the FLSA. The new amendment will take effect on October 1, 2024, and will expire on June 30, 2025, unless extended by the legislature.

The Alabama Department of Revenue issued guidance regarding the new amendment. This guidance includes a summary of the employer’s reporting obligations and addresses a common question of how the law may apply to an employee who works in multiple states. According to the guidance, for an Alabama resident, “wages earned in another state which is subject to the other state’s withholding tax are not Alabama wages subject to Alabama withholding tax. Since the wages are not Alabama wages subject to Alabama withholding tax, the exemption would not apply in this case.”

Next Steps

Employers with nonexempt workers in Alabama may want to take note of these new changes and may want to consider reviewing their payroll policies in light of these new definitions and updated guidance.