Alabama Won’t Collect State Income Tax on Overtime Pay After January 1

Starting January 1, full-time hourly employees in Alabama will enjoy a 5% increase in compensation for hours worked beyond 40 per week, as they will no longer be subject to state income tax on overtime pay. Governor Kay Ivey signed HB217 into law in June, eliminating the state’s tax on overtime pay.

“Hardworking Alabamians who go over and above in their efforts deserve to be rewarded, but far too often, extra pay from a job well done is eaten away by income taxes,” BCA President and CEO Helena Duncan said. “Exempting overtime pay from taxes provides added incentive, recognizes hard work and creates more pocket dollars for Alabama workers and families.”

Unless the Legislature votes to extend it, the exemption will end after the 2024 tax year. For the 2023 tax year, the new law requires employers to report to the Alabama Department of Revenue the amount of overtime paid to full-time hourly employees and the number of employees who received that pay.

The first reports are due January 31, 2024. Employers must report this data for the 2023 calendar year. In addition, this information must be reported monthly beginning in January 2024 through June 2025.