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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:

• For tax year 2023. An annual report, due January 1, 2024, that includes the total compensation received in 2023 by full-time employees for work performed over 40 hours in a week and the total number of employees for which the compensation was paid
• For tax years 2024 and later. The same information required for 2023 reported quarterly and filed at the same time as the corresponding quarterly income tax withholding tax return

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

Alabama is the first state to exempt overtime pay from state income tax; however, North Carolina (HB 490) and South Carolina (HB 3450) legislatures are considering similar bills.

The North Carolina and South Carolina bills would expand the state income tax exemption to bonuses.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor