OT on the QT? Bama’s Tax Exemption for Overtime

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Employers in Alabama (along with the rest of the country) have faced headaches the last several years with staffing shortages and shift coverage. In June, with bipartisan support, the Alabama Legislature passed House Bill 217 — a first-in-the-nation bill to incentivize hourly employees to work overtime. Beginning January 1, 2024, overtime pay will be exempt from the 5% Alabama income tax. The bill places no cap on how much overtime pay will be eligible for the exemption, but the governor added an executive amendment requiring employers to report to the Alabama Department of Revenue by January 31, 2024, the aggregate amount of OT paid during 2023 along with the number of full-time, hourly employees who received overtime pay. The Alabama Department of Revenue is now drafting a form for that purpose. The same reporting obligation will apply to the 2024 calendar year, but by that time it will be tied to the employer’s normal tax reporting of wage withholdings.

The bill is intended to entice employees to work overtime shifts, as they will be able to pocket more of their income from overtime pay than in the past. The tax cut has an odd expiration date, but it gives the Legislature time during the Spring 2025 regular session to extend and perhaps tweak the exemption if they so choose. The bill’s authors believe political pressure in an election cycle will prompt legislators to extend the tax cut. 

So, what should employers do now? First, call your payroll department (or vendor). You will need them to track overtime paid thus far in 2023 and to how many employees, and to start tracking this in real time for the remainder of this calendar year. Employees won’t get the tax cut for any hours worked in 2023, but you will still be required to report that information to the Alabama Department of Revenue on the forthcoming form. Then, beginning in 2024, payroll will need to adjust employee paychecks to eliminate income tax withholding for all overtime pay issued. 

 Stay tuned to see how this plays out in Alabama and whether other states follow suit.