At Madison Resources, it is our hope that we are perceived as a true partner to your staffing firm. To that end, we are always looking to assist you in providing necessary information, to promote accuracy and efficiencies, and make helpful resources available to you.
Beginning January 1, 2024, hourly paid employees in Alabama will not pay any state income tax on their overtime pay. The new law effectively gives hourly employees a 5% pay raise (the state income tax rate), but it also creates new administrative and reporting requirements for their employers.
What does this mean for you?
The State of Alabama passed Act No. 2023-421 in June of 2023. The law was intended to provide tax relief for Alabama hourly workers dealing with high inflation. Alabama legislators also touted the new law as providing a potential competitive advantage for state employers when hiring new workers.
This new law currently applies only to overtime paid before June 30, 2025, unless the state legislature takes action to extend the law before that date. The state only provided for this initial effective period so that it could assess the impact on state revenue. Unless the law is extended, any overtime pay earned before June 30, 2025, but which is not paid until after that date, will still be subject to taxation.
What new duties can employers expect under this law?
The new law imposes mandatory reporting obligations on Alabama employers. For the tax year beginning Jan. 1, 2023, employers are required to report the following information to the Alabama Department of Revenue by no later than Jan. 31, 2024:
• The total amount of compensation reported by full-time hourly wage employees for all work performed in excess of 40 hours each week; and
• The total number of employees for which compensation was paid.
After Jan. 1, 2024, employers also are required to supplement their initial report on either a monthly or quarterly basis. As always, we recommend speaking with your attorney, CPA, or industry
How can we help?
Madison Resources will systematically exempt overtime wages from state taxation on employee’s paychecks and will also create and remit all of the required reporting. There will be no changes to your current process for entering employee time for payroll and billing purposes.
Have Questions?
For more information, updates, and guidance:
https://www.revenue.alabama.gov/aldor-provides-guidance-for-overtime-pay-exempt-from-income-tax/
To read more on the reporting requirements:
https://www.revenue.alabama.gov/individual-corporate/overtime-exemption/
Contact Information:
To contact the Alabama Department of Revenue Withholding Tax via telephone: Phone: (334) 242-1300
Explore our website to find more Legislative Updates. Madison Resources is the premier payroll funding and back office support partner to the staffing industry. Grow with confidence.