Exempting overtime pay from income tax has become a hot topic at both the state and federal levels. In November 2023, Alabama became the first state to pass the exemption, but now state legislators have decided to let it sunset.
Alabama Overtime Tax
According to the Alabama Department of Revenue, the Alabama state income tax exemption applicable to overtime wages will end on June 30, 2025. Therefore, as of July 1, 2025, employers must once again withhold state income tax from any Fair Labor Standards Act (FLSA) overtime wages paid to non-exempt employees.
In 2023, when Alabama enacted legislation to temporarily eliminate the 5% Alabama state tax on overtime pay for full-time employees, there was consideration to make this a permanent law, but ultimately, the decision was made by legislators to allow the overtime exemption to expire in order to facilitate other tax cuts that will impact more citizens, including a reduction in the Alabama grocery tax.
Reporting Requirements
- Monthly/Quarterly: The elimination of the exemption also removes the requirement to report overtime wage data to the Alabama Department of Revenue. After the final exempt overtime wages are reported on the employer’s monthly or quarterly withholding tax filing, employers and payroll providers will no longer need to submit this.
- 2025 W2: When the 2025 W2 is issued, employers will submit the amount of exempt wages an employee earned during the period of the 2025 tax year in which the exemption was in effect within Box 14 of employee’s Form W-2 using “EX OT WAGES” as the indicator. This should not include exempt overtime wages in Box 16 of the W-2.
If Avizo completes payroll for your business, we will take care of making the shift in your employee accounts. We recommend that you share this change with your employees so they can be aware of any fluctuation in their expected income. As always, if you have questions about this change in tax, please reach out to our team.
Crissy Bonifay
Crissy is Avizo’s payroll pro. Having been with the firm for 25 years, she’s developed many talents, and we rely on her to be our go-to guide for payroll deadlines, processes, and software.
