Alabama has amended the provision which exempts overtime pay earned by employees from state taxation. The amended law is effective on Oct. 1, 2024.
The details:
Alabama recently 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 Dec. 31, 2023, and end prior to June 30, 2025.
However, the tax exemption under HB 217 was only provided to hourly employees and not to salaried non-exempt employees who are entitled to overtime under the Fair Labor Standard Act when working more than 40 hours in a workweek.
Amendment to Overtime Tax Exemption Provision:
As noted above, the original amendment to Alabama Code §40-18-14 via HB 217 is as follows:
“(3) 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.”
Alabama Code §40-18-14 was further amended via HB 407 to read:
“(3) 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.”
Consequently, effective Oct. 1, 2024, overtime wages earned by salaried 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.
Next steps:
· Effective, Oct. 1, 2024 through June 30, 2025, employers should not withhold Alabama state income tax for FLSA overtime wages paid to non-exempt salaried employees.
· ADP TotalSource updated payroll systems in January 2024 to meet Alabama’s original requirement. Alabama state income tax is not withheld from overtime compensation paid to an Alabama employee using the standard overtime earnings input on the payroll worksheet.
· You may need to contact ADP TotalSource if you requested a custom payroll setup that is impacted by the amended Alabama law. This includes situations where a separate overtime code was created for salaried, non-exempt employees as those codes will continue to withhold state income tax on compensation that would be considered exempt beginning on Oct. 1, 2024.
Have questions?
Please contact your ADP Service Representative with any questions.