July 20, 2023
Alabama law temporarily exempts mandatory overtime pay from state personal income tax
Alabama Govern Kay Ivey approved, HB 217, which, effective January 1, 2024 and through June 30, 2025, exempts from wages subject to state income tax and withholding the compensation required to be paid to employees for hours worked over 40 per week under the federal Fair Labor Standards Act (FLSA).
The Alabama Department of Revenue (Department) is directed to issue regulations administering the law.
Employer reporting requirements
Under the amendments to HB 217 requested by Governor Ivey, employers are required to submit the following reports to the Department, along with any additional information that the Department requests:
Federal overtime pay exceptions not addressed in HB 217
The FLSA requires that covered employees be paid 1.5 times their regular rate of pay for all hours worked over 40 per week. HB 217 does not state whether the wage exemption applies to all wages paid over 40 hours per week or only the premium portion. For example, it is unclear whether the exemption applies to the overtime premium rate of $5.00 for an employee with a regular rate of pay of $10.00, or the total compensation of $15.00 for hours worked over 40 per week.
HB 217 also does not address how the exemption applies to workers who under the FLSA may be given compensatory time off in lieu of overtime pay, such as state and local governmental employees and police and firefighter employees or healthcare workers who may be paid overtime for hours worked over eight in a day or 80 in a two-week period.
It is hoped that Department regulations will include an explanation as to how the overtime wage tax exemption will apply to these and other FLSA overtime pay exceptions.
Ernst & Young insights
The North Carolina and South Carolina bills would expand the state income tax exemption to bonuses.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor