Starting January 1, 2024, overtime pay for full-time hourly wage employees in Alabama will be exempt from state income tax.
This effectively gives these workers a 5% pay raise on their overtime earnings.
The new overtime tax exemption law was signed by Alabama Governor Kay Ivey in November 2023 and is part of the state's effort to provide tax relief and support for hourly workers.
Employers in Alabama are required to maintain accurate records of all overtime hours worked by their non-exempt employees to facilitate the new tax exemption.
The tax exemption only applies to overtime pay, defined as compensation for hours worked in excess of 40 per week.
Regular hourly wages remain subject to the state's 5% income tax.
Alabama's overtime tax exemption is unique - no other state currently has a similar law that excludes overtime pay from state income taxation.
The Alabama Department of Revenue has provided detailed guidance to employers on reporting requirements for the new overtime pay tax exemption.
Economists predict the overtime tax exemption could boost take-home pay for Alabama's hourly workers by hundreds of dollars per year, giving a lift to consumer spending in the state.
The new law is expected to incentivize employers to offer more overtime opportunities to their hourly staff, as the extra pay will be more attractive without the state income tax.
Alabama's overtime tax exemption is not permanent - it is set to expire after the 2024 tax year, unless state lawmakers vote to extend or make it a permanent policy.
While federal income taxes and Social Security/Medicare taxes still apply to overtime pay in Alabama, the state income tax exemption makes overtime earnings more lucrative for workers.
Alabama's decision to exempt overtime pay from state taxes was largely driven by concerns over worker shortages and the desire to make the state more competitive for hourly labor.
The new overtime tax law does not apply to salaried employees in Alabama - only hourly, non-exempt workers are eligible for the state income tax exemption on overtime pay.