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The Alabama Department of Revenue (“ALDOR”) issued helpful guidance on income tax withholding for compensation paid to nonresident employees, a/k/a remote workers. Most importantly, the August 25, 2026 Notice (“Notice”) to employers clarified the ALDOR’s position on when an Alabama-based employer has a withholding obligation on wages or salary paid to an employee who resides and works entirely in another state. The Notice explicitly states that an employer “should withhold Alabama income tax from wages paid to a nonresident employee only to the extent the wages are attributable to services physically performed in Alabama. If a nonresident employee performs no services in Alabama during the year, Alabama income tax withholding is not required solely because the employer is located in Alabama” [emphasis ours].
Consistent with that statement, the ALDOR confirmed it will not follow the Alabama Tax Tribunal’s controversial 2023 ruling in Bollinger v. State of Alabama Department of Revenue, which judicially created a convenience of the employer rule.
The Notice also points out several overriding federal statutory exceptions (e.g., maritime, railroad and aviation workers) as well as the state’s new 30-day safe harbor rule exempting Alabama earnings from income tax for certain out-of-state workers performing services in the state for 30 or fewer days in a calendar year. The 2025 legislation, patterned after the Council On State Taxation (COST)/AICPA model, became effective January 1, 2026. State Rep. Danny Garrett, Chair of the House Ways & Means-Education Committee, led the effort to pass that bill last year and urged the ALDOR to work with the business community and tax practitioners to clarify that Alabama is not a “convenience of the employer state.” ALDOR officials confirmed that during their panel presentation at the annual COST Southeast Region State Tax Conference on August 26 in Birmingham.
