A new Alabama law clarifies the types of overtime wages exempt from state withholding, prompting the Alabama Department of Revenue to promulgate new rules.

Last year, the Alabama legislature enacted Act 2023-421, excluding overtime wages paid to full-time hourly employees from Alabama withholding tax. The 2023 Act’s language prompted questions—namely, whether the Act exempted all wages paid for overtime. As written, the 2023 Act exempted all wages paid to an hourly employee for work over the 40th hour in the employer-defined workweek. However, calculating overtime often requires considering more than simply when an employee works over their 40th hour. Accordingly, the Alabama legislature passed Act 2024-437 this year, amending the “gross income” definition to specifically exclude amounts “paid as overtime compensation in accordance with the U.S. Fair Labor Standards Act” and sunsetting the prior “gross income” definition.

The 2024 Act accounted for the now-conflicting “gross income” definitions by including amendments preventing the two Acts from simultaneously applying. The 2023 Act provided the overtime exemption for tax years beginning after December 31, 2023, and ending prior to June 30, 2025. Since the 2024 Act altered the “gross income” definition, it also altered the 2023 Act’s sunset date to prevent conflicting definitions, allowing the 2024 Act’s definition to control from its October 1, 2024, effective date. The 2023 Act’s “gross income” definition is no longer applicable. Now, June 30, 2025, is the 2024 Act’s sunset date.

For employers governed by the National Railway Labor Act, the 2024 Act also included a provision ensuring the overtime exemption for overtime paid in accordance with the FLSA applies only to “hourly component overtime compensation” as defined in the applicable collective bargaining agreements. The 2024 Act did not change the reporting requirements imposed by the 2023 Act, explained here.

The Alabama Department of Revenue promulgated one new rule while amending two others, providing guidance for complying with the 2024 Act:

• Per the 2023 Act, employers must report exempt overtime wages monthly or quarterly via Form A-6 or Form A-1, respectively. The Department of Revenue implemented a new rule, Ala. Admin. Code r. 810-3-72-.03, which specifies that overtime wages included in box 14 of employees’ annual Form W-2 should correspond to the total exempt overtime wages reported on Form A-6 or Form A-1.

• The Department of Revenue amended Ala. Admin. Code r. 810-3-72-.02 to reflect the 2023 Act’s “gross overtime” definition’s new September 30, 2024 sunset date.

• The Department of Revenue amended Ala. Admin. Code r. 810-3-75-.01, providing additional guidance on completing employees’ Forms W-2. The amendment requires overtime wages exempted by either the 2023 Act or 2024 Act to be shown on Form W-2 as “Exempt Overtime Wages,” which employers can abbreviate to “EX OT WAGES.”

Takeaways

The 2024 Act’s “gross income” definition now only excludes overtime wages paid in accordance with the FLSA, while the newest regulations help guide employers in completing employees’ Forms W-2.