On June 4, 2025, the Alabama Department of Revenue (DOR) announced that the exemption of qualified overtime wages from Alabama state income tax and withholding ends on June 30, 2025. Thus, effective July 1, 2025, any amounts paid or received for overtime compensation is subject to Alabama income tax and withholding.

To support employer calculations of the overtime exemption, the DOR requires that Alabama employers provide monthly and quarterly overtime wage data. This reporting obligation no longer applies once the final exempt overtime wages are reported.

Because the overtime pay exemption applied from January 1 to June 30, 2025, Alabama employers will continue to be required to report the exempt overtime wages an employee earned in Box 14 of the 2025 Alabama Form W-2 with the label "EX OT Wages." Exempt overtime wages are excluded from the amount reported in Box 16 of the Alabama Form W-2.

More information on the Alabama overtime pay exemption, including the reporting requirements that apply, is available here.

Ernst & Young LLP insights

In March 2025, Alabama House Representative Anthony Daniels (D) introduced H.B. 467 to make the overtime pay exemption permanent effective June 1, 2025. The bill failed to pass before the Alabama legislature adjourned from the 2025 legislative session on May 14, 2025.

In the tax bill recently passed the US House of Representatives, taxpayers would be allowed a deduction for qualified overtime wages (excluding those paid to highly compensated individuals (5% owners, compensation over $160,000)). The provision would be effective retroactive to January 1, 2025, and would continue to apply through December 31, 2028. (See Tax Alert 2025-1120.) The bill is now under consideration by the US Senate and differences between the House and Senate versions of the bill will need to be negotiated through reconciliation.

If the federal overtime pay provision is enacted, it cannot be assumed that the Alabama legislature will automatically adopt conforming legislation. For instance, Colorado has enacted preemptive legislation (H.B. 1296) that specifically states that any overtime compensation that is excluded or deducted from federal taxable income must be included in Colorado taxable income.