Three new rules will take effect this year that alter the overtime wages subject to Alabama withholding tax and employers’ requirements in reporting those newly exempt wages. On October 31, 2023, the Alabama Department of Revenue’s Income Tax Administration issued three final rules that take effect December 3, 2023, and will cover all tax years beginning after December 31, 2023, and ending prior to June 30, 2025.  Notably, the entirety of overtime wages paid to full-time hourly employees will be excluded from Alabama withholding tax.

The New Rules and Amended Language

In Ala. Admin. Code r. 810-3-72-.01, the Department of Revenue amended the current rule by removing language that required employees who performed a mix of exempt and nonexempt work to have either all or none of their earnings taxed. The amended rule adds language excluding the entirety of overtime wages paid to full-time hourly employees from Alabama withholding tax and covers tax periods from January 1, 2024, through June 30, 2025. The amended rule will not apply to “salaried or other alternate payment methods made to employees.”

The Department of Revenue also implemented Ala. Admin. Code r. 810-3-72-.02, adding definitions and other qualifying information for employers. Specifically, the new rule:

• defines an “hourly wage paid employee” as an “employee that is paid a wage for each hour of work they complete.” For those employees, gross income will not include any amounts received for hours worked over 40 per week, even if it is paid at the regular rate of pay, rather than an overtime rate;
• excludes paid time off and holiday pay from determining hours worked over 40 per week. In effect, paid time off and holiday pay remain subject to Alabama withholding tax when taken during a week in which that employee’s hours worked are not in excess of 40 when the paid time off and holiday pay are excluded from the equation;
• provides specific carveouts for salaried employees, compensation not based on an hourly wage (e.g., piece rate or other alternative methods of payment), and commissions and bonuses paid in addition to an hourly wage;
• requires employers to perform additional reporting related to these overtime wages when filing withholding tax returns on a monthly or quarterly basis (via Form A-6 or Form A-1, respectively). Beginning January 1, 2024, employers must report both the total amount of exempt overtime wages for the filing period, as well as the total number of employees who were paid such wages.

The Department of Revenue’s third new rule amends Ala. Admin. Code r. 810-3-74-.01 by permitting employers to comply with the new reporting requirements electronically. Employers will be permitted—and are encouraged—to file Form A-6 and Form A-1 electronically, without needing prior approval from the Department of Revenue. Employers should comply with the new reporting requirements for total exempt overtime wages paid and total number of employees receiving such payment by using the Department of Revenue’s website when electronically filing Form A-6 or Form A-1.

Takeaways

These new rules change the overtime pay exemption calculation and impart new reporting requirements on Alabama employers through at least June 30, 2025.