On May 15, 2025, Alabama Governor Kay Ivey signed into law H.B. 379, which effective January 1, 2026, provides an exemption from state and local nonresident income tax for compensation paid to nonresident employees for 30 or fewer days of employment in the state during the calendar year and compensation paid to nonresidents temporarily present in the state for disaster/emergency-related services.

30-day exemption

Under H.B. 379, compensation paid to nonresident employees for services performed within the state for 30 or fewer days is exempt from Alabama state and local income tax and withholding if the following conditions are met:

• The employee performed employment duties in more than one state during the calendar year.
• The compensation was not paid to employees working in their capacity as a professional athlete, professional entertainer or public figure.
• The nonresident employee's state of residence provides a substantially similar exclusion, does not impose an individual income tax or the employee's income is tax exempt under the US Constitution or federal statute.

If the nonresident employee performs services within Alabama for more than 30 days in the calendar year, all compensation paid to the employee for the calendar year is subject to Alabama state and local income tax and withholding.

Disaster/emergency related service exemption

As a supplement to existing Alabama Section 40-31-3, H.B. 379 states that compensation paid to nonresidents temporarily in Alabama in connection with providing services pursuant to a disaster or emergency declared by the US President or the Alabama Governor is exempt from Alabama state and local income tax and withholding.

Employer protection for penalty and interest assessments

The Alabama Department of Revenue (Department) will not assess interest and penalties for failing to withhold and remit nonresident income tax under this provision, provided the employer adopts one of the following procedures:

• The employer tracks employee work locations on a daily basis through a time and attendance tracking system in which: (1) employees are required to report their work location for every day they work outside of the state from which they primarily perform their services and (2) based on the data provided by employees, the system facilitates the employer's ability to allocate compensation to the jurisdictions where employees perform services.

Alternatively

• The employer relies on employees' annual determinations of the time they are expected to perform services within Alabama, provided the employer has no actual knowledge that the employees' information is fraudulent and neither the employer nor its employees colluded to evade taxation in making this determination.

Ernst & Young LLP insights

H.B. 379 provides welcome relief for Alabama's short-term business travelers; however, the impact on remote workers is uncertain.

In response to COVID-era tax return filings, the Department's rulemakings, upheld by the Alabama Tax Tribunal, revealed it had adopted an administrative policy of imposing Alabama income tax on the wages employees earned while working from home outside of Alabama. (See Tax Alert 2023-0609.)

The Department's rulings on remote work hinged on the employees' continued connection to their Alabama employer while working remotely from outside the state, disregarding the physical location from where services were performed. Although this interpretation is not expressly set forth in Alabama law or administrative guidance, the result is akin to the "convenience of the employer rule" imposed by several states (e.g., New York) and localities (e.g., Philadelphia). (For the income tax withholding requirements, see Ala. Code § 40-18-70 and Alabama Rule 810-3-71-.01.)

The language of H.B. 379 does not specifically state that the 30-day nonresident income tax exemption applies to employees working outside of the state for an Alabama employer. Specific guidance is needed from the Department to safely arrive at this conclusion. Even if the case can be made that remote workers qualify for the 30-day exemption, under the language of the law, the provision clearly does not apply to employees working in a state without a substantially similar exemption (e.g., South Carolina and North Carolina).

Employers should seek advice from their employment tax advisor concerning the application of H.B. 379 to their remote workers.