Alabama: Exemption for Overtime Pay Amended

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APPLIES TO

All Employers with Employees in AL

EFFECTIVE

October 1, 2024

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Quick Look

  • Starting October 1, 2024, overtime that is paid in accordance with the Fair Labor Standards Act (FLSA) is exempt from Alabama state income tax.

Discussion:

HB 407 amended Alabama’s Overtime Exemption Act to change what type of overtime pay is exempt from state income tax. Starting October 1, 2024, overtime that is paid in accordance with the Fair Labor Standards Act (FLSA) is exempt from state income tax. Originally, state tax exempt overtime was defined as compensation received by full-time hourly wage-paid employees for any overtime work they performed in excess of forty hours per workweek. The definition left questions as to whether overtime rates calculated based on overtime hours and commission earnings were fully state income tax exempt.

 

There is also additional guidance from the Alabama Department of Revenue. Some important takeaways from the guidance are:

 

  • For employers governed by the National Railway Labor Act, the exempt overtime pay is based on the overtime compensation as stated in relevant collective bargaining agreements.
  • For an Alabama resident, wages earned in another state which is subject to the other state’s withholding tax are not Alabama wages subject to Alabama withholding tax. Since the wages are not Alabama wages subject to Alabama withholding tax, the exemption would not apply in this case.
  • If the wages are considered Alabama wages subject to Alabama withholding tax, any wages which would be considered overtime under the Fair Labor Standards Act would qualify whether earned by a resident or a non-resident.

 

The exemption is set to expire on June 30, 2025, unless the legislature extends it.

 

Action Items

  1. Review the amended law here.
  2. Review the Alabama Department of Revenue guidance here.
  3. Update payroll processes.
  4. Train appropriate personnel on the requirements.

 

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2024 ManagEase