New Alabama Overtime Law Offers Tax Exemption, Bringing Financial Relief to Employees

A recently enacted overtime law in Alabama will result in increased paychecks for certain employees, thanks to a tax exemption.

What is the New Alabama Overtime Law?

Bipartisan support helped Alabama’s legislature pass House Bill 217 in June, making it the first-ever piece of legislation encouraging hourly workers to put in extra time. A recently passed overtime law in Alabama will enable hourly employees who work extra hours to retain a larger portion of their earnings. Weekly hours worked more than 40 will be free from Alabama’s income tax under the recently passed overtime law. Under the new Alabama overtime law, if you work 45 hours in a week, you will only be subject to the 5% state income tax on 40 hours of your earnings, says Kiplinger. 

Overtime pay in Alabama will be free from the 5% state income tax beginning January 1, 2024. The legislation sets no limit on the amount of overtime pay that is eligible for the exemption. However, the governor’s unilateral amendment required employers to report to the Alabama Department of Revenue the total amount of overtime paid in 2023 and the number of full-time, hourly employees who received overtime compensation by January 31, 2024.

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New Alabama Overtime Law – Photo by: (Unsplash)

What steps could be taken by the employer?

Employers will need to monitor and document overtime payments and the count of employees receiving overtime pay in 2023. This ongoing tracking should continue in real-time for the remaining part of the current calendar year.

Even though employees won’t enjoy the tax cut on overtime hours worked in 2023, employers must still report this information to the Alabama Department of Revenue using the forthcoming form. From 2024 onwards, payroll processes must be adapted to exclude income tax withholding from all disbursed overtime pay.

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