Navigating Alabama's New Tax Overtime Law

PRemployer on September 8, 2023

Navigating Alabama's New Tax Overtime Law

Alabama recently passed HB217 – under its provisions, workers will receive a state tax exemption for overtime hours. This measure is part of the state's ongoing 'Plan for Prosperity' initiative. However, the bill underwent several different changes from its initial proposal.  

Whether you've been tracking it in the news or just heard about it, keep reading to learn more about its provisions and how it will impact your business. 

Questions? Contact Us!

What Is Alabama's New Tax Overtime Law? 

At the beginning of June 2023, Alabama lawmakers passed House Bill 217, which Governor Kay Ivey signed law shortly thereafter.  

Beginning in 2024 and continuing through June 2025, workers will not be taxed the state income levy on their overtime hours. The current state income tax rate is 5%. Lawmakers capped the total exemption of this bill at an aggregate $25 million during negotiations, but Governor Ivey removed it before signing to ensure more employers and employees could benefit from the law. It applies to full-time hourly employees in every sector and defines overtime as any hours worked above 40 hours per week for full-time employees. The Senate and the House passed this measure unanimously, anticipating significant beneficial effects for businesses and workers throughout the public and private sectors. 

Lawmakers passed this law at the same time as they also took action to start reducing grocery stores' sales tax rates. These two measures and a $150 tax rebate per filer make HB217 part of Alabama's largest tax relief packages in the state's history. 

What Effects Will HB217 Have? 

HB217 is scaled back from its original terms but still presents clear benefits. For workers, it presents these effects: 

  • Employees will see a 5% 'discount' on their state income tax bill for their overtime hours. 
  • Employees have more incentive to work more hours with a single employee for more hours instead of two or more employers. 

For employers, it produces these effects: 

  • There's a greater incentive to offer overtime hours to full-time employees over hiring part-time or seasonal staff. 
  • Employers can benefit from a more stable labor supply without paying incentives out of their pocket. 
  • Businesses can more predictably schedule and staff their facilities. 
  • Employers will potentially retain more employees long-term in a tight labor market. 

After the active window of 2024-2025, the government will evaluate the effects on state revenue and programs to determine if the law will be renewed or extended. 

How Will It Impact Businesses? 

Alabama is the first state to propose and pass a measure of this kind. Both sides of the aisle are confident that this will generate positive impacts for businesses because it incentivizes more predictable productivity without forcing businesses to incur extra costs. Full-time employees can take overtime shifts while receiving a tax break, which increases the likelihood of workers taking those shifts and providing more reliable staffing for the business.  

However, businesses will need to complete some administrative and regulatory tasks to comply with the bill. Primarily, company payroll staff will need to carefully identify which shifts are overtime. Even though businesses will pay payroll taxes on standard and overtime hours as the norm, these records will help the state monitor tax reporting and filing.  

Under the terms of the bill, companies will need to provide these forms of documentation

  • Records of how much overtime was paid out in 2023 and how many employees received overtime pay (due by January 31, 2024). 
  • Monthly or quarterly records of overtime pay and the number of employees who receive it throughout 2024. Employers will provide these records at the same time as corresponding withholding tax returns. 
  • Other information as requested by the Alabama Department of Revenue on a case-by-case basis 

While employers will not be required to pay additional funds to cover the tax break, this slight increase in administrative and reporting responsibilities must be accounted for in your payroll department or through your third-party payroll service. 

Stay on Top of Regulatory and Legal Changes With a PEO 

Complying with reporting obligations under HB217 is just a small change in your organization's reporting responsibilities. But keeping up with the constantly changing landscape of reporting requirements and a relentless pace of payroll management obligations can be overwhelming for any organization. Many businesses in Alabama and nationwide are turning to PEOs, or professional employer organizations, to manage payroll, HR, benefits administration, and workers' compensation responsibilities. These third-party services stay up-to-date on changing regulations and laws on behalf of your business so you can focus on core revenue tasks. 

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