Alabama Overtime Pay will be Tax Exempt in 2024

An image of Overtime paperwork

New legislation passed last week will temporarily eliminate the 5% Alabama state tax on overtime pay for full-time employees. This is designed to incentivize employees to seek and maintain full-time employment by putting more money in employees’ paychecks. For employers, it will require additional reporting to the Alabama Department of Revenue.

Employee Overtime Pay in Alabama

This legislation will begin January 1, 2024 and is currently set to expire 18 months after it begins. For that period, Alabama’s 5% income tax will not apply to any overtime pay (any hours worked over 40 hours) for full-time employees. Click here to read about Overtime Laws in Alabama.

There is a chance this legislation could be extended beyond the 18-months currently in place. The original version of the bill proposed the elimination of the 5% tax cut on overtime pay to last for three years, but included a $25 million aggregate cap on the tax cut. Instead, Governor Kay Ivey asked for the cap to be removed and to shorten how long the bill will be in effect. For now, this is set to last 18 months.

New rules for Alabama Overtime in 2024

Changes for Alabama Business Owners

Of course, with change comes new regulations for business owners. For the 2023 tax year, employers (both private and public) will be required to report both the amount of overtime money paid to full-time hourly employees and the number of employees who received that pay. Employers are required to provide this data to the Alabama Department of Revenue by January 31, 2024.

Starting in 2024, this data must be reported on the same due date as monthly or quarterly reports for withholding tax returns. These forms and processes have not been released yet, but Avizo will provide updates to our clients as soon as we have more information.  If you have concerns or questions in the meantime, please contact us.

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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.

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