The Alabama Department of Revenue (DOR) has published updated employer guidance concerning the income tax withholding obligations for the wages of nonresident employees.

Of significant note, employers are instructed that, notwithstanding the Alabama Tax Tribunal's ruling in Bollinger v. State of Alabama Department of Revenue (Dkt. No, 22-390, March 8, 2023), employers should withhold nonresident Alabama income tax only from those wages that are attributable to services physically performed within the state.

The guidance also reminded employers about the 30-day safe harbor rule exempting Alabama earnings from taxation for certain out-of-state workers performing services in Alabama for 30 or fewer days in a calendar year. (See Tax Alert 2025-1106.)

Background

In Bollinger, the Alabama Tax Tribunal (court) upheld an Alabama DOR assessment of income tax on the wages that a remote worker earned from his Alabama employer while working from his home office in Idaho.

The ruling hinged on the employee's continued connection to his Alabama employer while working remotely from Idaho, 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.)

Ernst & Young LLP insights

The Department's updated guidance provides welcome clarification and practical relief for both employers and nonresident employees.

For nonresident employees who perform services remotely outside Alabama, the guidance may help them avoid overwithholding and eliminate the administrative burden associated with seeking refunds of Alabama income tax on wages earned outside the state.

The guidance also provides significant administrative relief for employers. Rather than attempting to apply the broader sourcing analysis reflected in Bollinger, employers may continue to determine Alabama income tax withholding based on the location where services are physically performed. This approach is generally more consistent with existing payroll systems and established multistate wage allocation methodologies.

Because the Bollinger decision remains on the books while the DOR's withholding guidance adopts a different approach, employers should continue to monitor developments in this area and consult with tax advisors regarding any potential differences between wage withholding requirements and an employee's ultimate Alabama income tax liability and filing obligations.