Alabama Enacts Bill Regarding Taxability of Overtime Wages

As previously announced and as described in theADP TotalSource's Insights and Solutions bulletin, in June 2023, Alabama enactedHouse Bill 217(HB 217 or the Bill), which excludes from gross income for state income tax (SIT) purposes amounts received by a full-time hourly wage-paid employee as compensation for work performed in excess of 40 hours in a week.This exclusion goes into effect for overtime wages paid beginning Jan. 1, 2024, and is currently scheduled to end on June 30, 2025.

Please review this communication carefully asyour assistance is requiredto accurately exclude your Alabama employees’ overtime wages from Alabama SIT withholding.

Reporting overtime wages

Alabama requires ADP TotalSource^® to report wages excluded from state income tax on a monthly and/or quarterly basis beginning in 2024 for all ADP TotalSource client-employees under ADP TotalSource’s account with the State of Alabama.ADP TotalSource client-employee wages excluded from Alabama state income tax beginning Jan. 1, 2024, will be reported by ADP TotalSource to the Alabama Department of Revenue (DOR).If you are not an ADP TotalSource client for part or all of a future year, you will be responsible for providing your organization’s excluded earnings to the Alabama DOR.

In addition, ADP TotalSource will also file the required one-time report of 2023 overtime paid to Alabama hourly-paid client-employees by Jan. 31, 2024. If you were not an ADP TotalSource client for part or all of 2023, you will be responsible for providing your organization’s 2023 overtime to the Alabama DOR.

Please contact your dedicated service professional with any questions.

Action required

ADP will automatically exclude overtime wages, paid using the Overtime field on the Payroll Worksheet, from Alabama SIT for payrolls with pay dates on or after Jan. 1, 2024, for your organization’s employees coded to Alabama for SIT withholding.

Your organizationmustcontact ADP to modify your configuration if certain overtime wages do not qualify to be excluded from Alabama SIT.

Please see the Details section below for more information, but some examples of wages that do not qualify for the exclusion from Alabama SIT and do not count toward the 40-hour weekly threshold are:

(i) Wages paid for hours not worked (ex: paid sick leave)

(ii)Wages paid for hours worked in most non-Alabama jurisdictions

(iii)Wages paid to salaried nonexempt employees.

If your organization needs to modify your configuration to include certain overtime wages for Alabama SIT, or if other Earnings types in addition to overtime need to be exempt from Alabama SIT, such as Double Time or Shift Premiums paid to hourly employees in Alabama for work performed greater than 40 hours in a week, please contact your ADP TotalSource Payroll Advisor to specify the additional earnings types that should or should not be excluded from Alabama SIT.

The Details

The Bill provides that taxable income for Alabama SIT purposes will not include compensation for work performed more than 40 hours in a week.All other federal, state and local taxes are unchanged by the Bill.

Wages excluded from Alabama SIT include:

· Overtime and double time for hours worked more than 40 hours in a workweek,

· Shift premiums or differentials paid on eligible overtime and double time wages,

· Overtime and double time paid on bonuses and similar payments if the overtime and double time were earned for working more than 40 hours in a workweek.

The following wages arenotexcluded from Alabama SIT and donotcount toward the 40-hour weekly threshold:

· Wages paid for hours not worked, such as paid sick leave, paid time off, and jury duty leave.

· For example, if an employee is paid for 8 vacation hours and works 32 regular hours and 12 hours of overtime, only the wages associated with 4 of the overtime hours will be exempt from Alabama SIT because the 8 vacation hours would not be counted toward the 40-hour weekly threshold.In this scenario, the wages exempt from Alabama SIT will need to be paid using aseparate Hours and Earnings codefrom wages that are not exempt from Alabama SIT

· Wages paid for hours not subject to Alabama state income tax withholding.In general, these would be hours worked outside Alabama in a state that also has a state income tax.

· For example, if an employee works 8 regular hours in Georgia, 32 regular hours in Alabama, and 12 overtime hours in Alabama in each workweek, only the wages associated with 4 of the overtime hours will be exempt from Alabama SIT because the 8 hours worked in Georgia would not be counted toward the 40-hour weekly threshold.In this scenario, the wages exempt from Alabama SIT will need to be paid using aseparate Hours and Earnings codefrom wages that are not exempt from Alabama SIT.

· Wages paid to Alabama residents working in a state that does not have a state income tax (ex: Florida, Tennessee, etc.) are subject to Alabama SIT for hours worked in those states.Hours worked by those hourly employees are counted toward the 40-hour weekly threshold and hours more than 40 hours in a week would be exempt from Alabama SIT. The same would apply to hours worked by Alabama residents in a jurisdiction where the client’s configuration would result in the employee being subject to Alabama SIT.

· Wages paid to salaried nonexempt employees. The exclusion from Alabama SIT applies only to overtime paid to hourly-paid workers.

Next steps

We’re here to help! Reach out to your ADP TotalSource Payroll Representative for additional assistance if you need any of the following:

· New earnings codes for overtime that will not be exempt from Alabama SIT, such as overtime pay for salaried non-exempt employees or overtime pay if your business counts any non-worked hours towards the overtime hours amount.

· Updates to existing earnings codes that are used to pay wages to hourly-paid employees for work performed more than 40 hours in a week that will be exempt from Alabama SIT.

· Configuration to subject certain overtime wages to Alabama SIT, or if other Earnings types in addition to overtime need to be exempt from Alabama SIT, such as Double Time or Shift Premiums paid to hourly employees in Alabama for work performed greater than 40 hours in a week.

Additional resources

Alabama Department of Revenue Overtime Exemption

ADP SPARK blog

Thank you.

ADP TotalSource