The Definitive Guide to Alabama Overtime Laws & Compliance

Overtime pay is an important aspect of managing hourly employees, but Alabama's approach to overtime brings its own nuances. Recent updates to state tax laws have introduced unique reporting requirements for employers, adding new responsibilities to the payroll process. Keeping up with these changes is key to staying compliant and avoiding payroll errors.

Unlike other states with their own wage and hour laws, Alabama follows the federal framework for overtime. Employers must also stay aware of how recent state-level tax exemptions for overtime pay impact their reporting practices. Awareness of both federal and state requirements ensures payroll accuracy and compliance with state regulations.

If you're supervising payroll or HR compliance, understanding how Alabama handles overtime is important for managing employee pay and navigating recent state tax updates effectively.

Understanding Overtime Regulations in Alabama

The Fair Labor Standards Act (FLSA) governs overtime pay in Alabama, where no separate state-level overtime law exists. Under the FLSA, employers must pay nonexempt employees time and a half for any hours worked over 40 in a single workweek. This federal standard applies across Alabama, creating a consistent framework for overtime.

Alabama also defaults to the federal minimum wage of $7.25 per hour, as the state does not have its own minimum wage law. For employers, this simplifies wage compliance but reinforces the importance of adhering to federal labor standards.

A recent update to Alabama’s tax code has introduced an overtime pay exemption from state income tax. Beginning January 1, 2024, full-time hourly employees' overtime wages are no longer subjected to Alabama state income tax. Employers are required to report the total amount of exempt overtime paid and the number of employees earning overtime through monthly or quarterly filings with the Alabama Department of Revenue (ALDOR). The exemption applies to overtime earned before June 30, 2025.

Alabama Overtime Tax Exemption Basics (2024–2025)

Alabama rolled out a significant update to its tax rules, creating a state income tax exemption for overtime wages earned by full-time hourly employees. This exemption applies exclusively to overtime pay and is meant to provide financial relief for eligible workers while simplifying payroll tax calculations for employers.

The exemption is available for overtime wages earned from January 1, 2024, through June 30, 2025. To qualify, employees must work more than 40 hours in a single workweek, and the overtime compensation must be paid before the June 30, 2025, deadline. Payments processed after this date, even if earned earlier, will not qualify for the exemption.

How Hours Are Counted

Only hours actively worked contribute to the 40-hour threshold for overtime eligibility. Paid time off (PTO), including vacation days and sick leave, does not count toward this total. Employers should carefully monitor hours worked each week to ensure accurate calculations. Missteps in tracking hours could lead to incorrect reporting or missed exemptions.

Employers must also meet specific reporting requirements to comply with Alabama's new rules. These reports include details on the total amount of exempt overtime paid and the number of employees receiving qualifying overtime wages.

Who Must Comply with the New Overtime Reporting Requirements

All employers responsible for withholding Alabama state income tax from employee wages must comply with the updated overtime reporting rules. Businesses processing payroll for any employees in Alabama are required to file detailed reports with the Alabama Department of Revenue. These reports must include the total amount of exempt overtime paid and the number of employees receiving overtime wages.

Distinctions Between Eligible and Non-Eligible Employees

The tax exemption for overtime wages applies exclusively to full-time hourly employees. To qualify, these employees must work more than 40 hours in a single workweek, and their overtime pay must align with hourly calculations. Salaried employees, commission-based workers, and individuals compensated through other pay structures do not qualify for this exemption. Only hourly wage earners who meet the overtime threshold are included.

To clarify:

Eligible: Full-time hourly employees earning overtime pay for hours exceeding 40 in a week.
Not Eligible: Salaried employees, part-time workers with fixed pay, or employees earning bonuses or commissions unrelated to overtime hours.

Reporting for Employees Working Across Multiple States

For employees working in both Alabama and other states, only wages subject to Alabama withholding qualify for the tax exemption. Employers must calculate overtime separately for Alabama-withheld wages and report only those amounts. If an employee's overtime spans multiple states, the exemption can only be applied to the portion of wages tied to Alabama state income tax withholding.

Employer Responsibilities for Reporting and Recordkeeping

Alabama employers must meet clear reporting and recordkeeping requirements to stay compliant with overtime laws. Each deadline and filing expectation plays a role in ensuring accurate tax reporting, so attention to detail is necessary.

Monthly and Quarterly Reporting Requirements

Employers must submit overtime data regularly using Alabama's designated tax forms. For monthly filers, Form A-6 is required, while quarterly filers use Form A-1. Each report must include:

Total Overtime Paid: The aggregate amount of exempt overtime wages paid during the reporting period.
Employee Count: The total number of full-time hourly employees who earned overtime pay during that same period.

These reports must align with Alabama's tax exemption rules and be submitted alongside withholding returns. Ensuring accuracy in these figures is essential for maintaining compliance.

Filing Through My Alabama Taxes

The My Alabama Taxes portal is the preferred method for submitting all required reports. Employers can either enter data manually or upload bulk files depending on their filing needs. Using this secure online system reduces the likelihood of errors and streamlines submissions. My Alabama Taxes also allows employers to make corrections to previously submitted reports efficiently if adjustments are necessary.

Calculating Overtime for Compliance

Employers processing overtime in Alabama need to follow a straightforward formula outlined by the FLSA. Overtime pay is time and a half for every hour worked beyond 40 in a single workweek. This calculation ensures employees are compensated fairly and payroll complies with federal standards.

What Counts as "Hours Worked"?

Only actual hours spent working qualify toward the 40-hour threshold. Paid time off, such as vacation days, sick leave, or holidays, does not count. For instance, if an employee works 38 hours and uses 8 hours of PTO in the same week, only the 38 hours are considered "worked." No overtime would apply in this scenario.

Employers should also track less obvious work hours, such as on-call time or mandatory training, as these can sometimes be included depending on the situation. Clear and accurate records eliminate confusion and reduce the risk of payroll errors.

Breaking Down Overtime Pay in Alabama

When calculating exempt overtime for Alabama's state tax purposes, employers must separate overtime pay from regular wages. Each step of the process should be precise to ensure compliance with state and federal requirements.

Here's how to calculate gross wages, determine the exempt portion, and identify taxable wages:

Add up gross wages: Total all earnings for the workweek, including base pay and overtime compensation.
Identify exempt overtime: Determine the portion of overtime pay eligible for Alabama's state tax exemption. Only overtime earned by full-time hourly employees qualifies.
Subtract the exempt amount: Deduct exempt overtime from gross wages to calculate the taxable portion for state income tax withholding.

Example of Overtime Calculation

A full-time hourly employee earns $18 per hour and works 46 hours in one week. The calculation would look like this:

Step 1: Calculate gross wages
Regular pay: 40 hours x $18 = $720
Overtime pay: 6 hours x ($18 x 1.5) = $162
Total gross wages: $720 + $162 = $882
Step 2: Determine exempt overtime
The $162 in overtime qualifies for Alabama's state tax exemption.
Step 3: Calculate taxable wages
Gross wages ($882) - Exempt overtime ($162) = $720 taxable wages

In this example, $720 would be subject to Alabama state income tax withholding, while the $162 in overtime pay remains exempt.

Employers should set up payroll systems to handle these calculations automatically and accurately. Even minor errors in reporting can cause compliance issues and disrupt employee paychecks.

Ensuring Seamless Overtime Compliance

Managing overtime compliance in Alabama requires clarity and precision at every step. Employers must ensure their processes align with both federal and state requirements to avoid errors and penalties. A well-organized approach to classifications, time tracking, and payroll calculations is key to staying compliant.

HR software designed for payroll and compliance can make these tasks more manageable. Employers often use centralized systems to track hours, calculate exempt wages, and generate reports required by the Alabama Department of Revenue.

These systems can automatically flag overtime hours once employees exceed the 40-hour threshold. They also separate taxable wages from exempt overtime, reducing the risk of payroll errors. Additionally, they can produce accurate reports for ongoing filings, like Forms A-6 and A-1, ensuring compliance with state reporting requirements.

By integrating a streamlined solution, employers can maintain accurate records, simplify reporting tasks, and stay ahead of deadlines with less manual effort.

Navigating Alabama's overtime laws and reporting requirements can be complex, but staying informed and proactive helps ensure compliance. We understand the challenges employers face when managing payroll and keeping up with changing regulations. If you're looking for a comprehensive solution to streamline your HR processes and maintain compliance, book a demo with GoCo to see how our platform can help you stay on top of overtime reporting and beyond.