Amendment to Recent Alabama Overtime Exemption Law

As of October 1, 2024, significant changes have been made to Alabama’s Overtime Exemption Law that could impact employers with full-time employees working or living in Alabama. This recent amendment expands the scope of overtime pay that is exempt from state income tax, and it’s important for employers to be aware of these updates to ensure compliance.

Background on the Original Overtime Exemption Law

The Overtime Exemption Act, which went into effect on January 1, 2024, provided that overtime pay received by full-time hourly employees for hours worked above 40 in a given week was excluded from gross income and therefore exempt from Alabama State Income Tax. This exemption applied to both residents and non-residents, including seasonal workers. However, salaried nonexempt employees were not included in this initial exemption.

Key Amendment: What Changed on October 1, 2024?

On October 1, 2024, an amendment to the Overtime Exemption Act came into effect, further expanding the types of employees eligible for the tax exemption. Here’s what the change means:

• Inclusion of Salaried Nonexempt Employees: Under the amendment, salaried nonexempt employees are now eligible for the same overtime tax exemption that was previously only available to full-time hourly employees. Any overtime pay received by these salaried nonexempt employees is now excluded from gross income and exempt from Alabama State Income Tax.
• Alignment with the Fair Labor Standards Act (FLSA): The amended law specifies that overtime compensation, as defined by the Fair Labor Standards Act (FLSA), is now excluded from gross income for state tax purposes. This applies to overtime pay earned between October 1, 2024, and June 30, 2025.

What this Means for Employers

• Payroll Clients with Employees Already in Alabama: If your business currently has employees working or living in Alabama, there is no immediate action required on your part. CyberPay, our payroll software provider, is actively working to update their systems to account for the new overtime exemption. As soon as the programming is ready, we will implement these changes seamlessly.
• Clients Planning to Expand into Alabama: If your business is not currently operating in Alabama but plans to hire employees there in the future, please inform us as soon as possible. This will allow us to ensure that your payroll systems are set up to handle the new exemption before any employees start working in Alabama.

Reporting Requirements

It’s important to note that employers must still comply with the monthly reporting requirements under the original law. Employers are required to report:

• The total aggregate amount of overtime paid.
• The total number of employees who received overtime pay.

This report must be submitted monthly to the Alabama Department of Revenue.

For any additional questions or assistance, please reach out to our team. We’re here to help guide you through these changes.

For More Information

If you have any questions, please contact our Tax Services team at 210-201-7079, toll-free at 1–888–757–2104, or payroll@gbizadvisors.com.