Alabama’s Overtime Tax Exemption: What It Was and What Comes Next

From January 1, 2024, through June 30, 2025, Alabama implemented a unique state-level tax exemption that excluded qualifying overtime wages from state income tax. This temporary change applied to full-time hourly employees and covered earnings for hours worked over 40 in a single week.

With the exemption period closing on June 30,2025, it’s important for employers to understand how this impacts year-end reporting and compliance requirements.

A Look Back: What the Overtime Exemption Covered

The Alabama Overtime Exemption was designed to offer financial relief to workers by excluding certain overtime wages from gross income for state income tax purposes. Eligible overtime pay was:

• Earned by full-time hourly employees
• For hours worked in excess of 40 per week
• Paid between January 1, 2024, and June 30, 2025

The exemption meant employees kept more of their paycheck, as the standard 5% state income tax was not applied to those qualifying overtime earnings.

Reporting Requirements

While Alabama’s overtime tax exemption reduces state taxable income, employers are still required to track and report all overtime wages accurately for both quarterly filings and year-end forms:

• Q1 and Q2 Reporting: Employers must continue to report exempt overtime wages on all monthly and quarterly Alabama filings through June 30, 2025
• Form W-2 (2025): The total amount of exempt overtime wages earned in Q1 and Q2 must be included in Box 14, clearly labeled to reflect the exemption
• Box 1 (Federal wages) will still include all overtime earnings, as the exemption applies only to Alabama state income tax, not federal

If your payroll system doesn't track this exemption separately, manual adjustments or reporting overrides may be required to remain compliant.

Staying Ahead with Payroll Tools That Adapt

As tax laws evolve, businesses need payroll systems that can adapt quickly. Cloud-based payroll systems—like Greenshades—can:

• Automatically apply jurisdiction-specific exemptions and tax rules
• Provide audit-ready reports to ensure year-end compliance
• Track gross and exempt wages clearly for both state and federal reporting

What’s Next?

Unless extended by new legislation, Alabama’s exemption will expire after June 30, 2025. That means:

• Overtime earnings after that date will once again be subject to Alabama state income tax
• Employers should verify that their payroll system reverts to normal taxation rules starting July 1, 2025

Greenshades Keeps You Compliant

Regulatory changes like Alabama’s exemption require payroll systems that are not just accurate but also flexible. With Greenshades, you can:

• Configure your system to meet state-specific rules
• Ensure proper W-2 reporting with real-time tax calculations
• Maintain confidence that you’re applying the correct tax treatment—no surprises come filing season

Want to make sure your reporting reflects this change accurately? Connect with us to learn more about our proactive payroll compliance solutions.