Alabama Issues Guidance, Proposed Rules on Overtime Pay Exemption

Effective for tax years beginning on or after January 1, 2024, overtime pay received by a full-time hourly employee for hours worked over 40 in a given week will be excluded from gross income and exempt from Alabama state income tax. Employers are required to report the total aggregate amount of overtime paid and the total number of employees who received overtime pay. The Alabama Department of Revenue (DOR) has issued reporting guidance and Frequently Asked Questions for employers.

Reporting Requirements

Employers are required to provide the DOR with a one-time report including the aggregate amount of overtime paid during 2023, along with the number of full-time hourly employees who receive the pay. Employers are also required to provide a monthly or quarterly report of the same information beginning in 2024, tied to the employer’s reporting of withholding tax. All employers required to withhold Alabama tax from employee wages are required to report overtime.

Proposed Rules

The DOR also recently issued proposed rules to: provide guidance to employers on reporting requirements, further clarify the qualifying overtime that will be exempt from state taxation, and define terms.

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Lia Coniglio, Esq., is Managing Editor of PayState Update and Senior Manager of State Payroll Information Resources for PayrollOrg.