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Effective January 1, 2024, Alabama's new legislation, Act 2023-421, excludes wages received by hourly employees for hours worked above 40 hours in any given week from gross income.
To provide clarity on this update, the Alabama Department of Revenue has posted Guidance and FAQ. Here are the key points to take note of:
Beginning January 1, 2024, through June 30, 2025, overtime pay received by hourly employees as compensation for hours worked in excess of 40 hours in a week qualifies as exempt
For withholding tax purposes, only wages subject to Alabama withholding are used in calculating when the 40-hour weekly threshold has been exceeded. This applies to employees who are residents of Alabama and to employees who are non-residents
For an Alabama resident, wages earned in other states that are subject to the other state’s withholding tax are not subject to Alabama withholding tax; therefore, they are not used in the calculation determining the 40-hour threshold for Alabama withholding purposes
Only wages subject to Alabama withholding above 40 hours are used in the withholding tax determination for non-residents
Multiple weeks cannot be averaged to determine what wages are exempt
This legislative update brings notable changes to how wages are treated for taxation, particularly for hourly employees, and it is crucial for both residents and non-residents of Alabama to be aware of these nuances for accurate compliance with the law.
Click here to view the complete Overtime Pay Exemption Reporting Guidance and FAQs