Alabama’s Overtime Income Tax Exemption is Expiring

A law passed by the Alabama Legislature in 2023 temporarily exempted full-time hourly workers from paying state income tax on overtime pay (hours worked beyond 40 per week). This exemption, which had an expiration date imposed in the original legislation, will expire on June 30, 2025.

Therefore, as of July 1, 2025, employers must once again withhold state income tax from any Fair Labor Standards Act (FLSA) overtime wages paid to non-exempt employees.

What should employers do to comply?

To comply, employers should adjust payroll system set ups, or you can contact your payroll provider to make sure that taxes are taken from overtime pay for any earnings after June 30, 2025.

Will the exemption be reinstated later?

The Alabama Legislature introduced legislation in the 2025 session that would have extended the exemption from Alabama income tax for “overtime” pay, but it failed to pass.  We will continue to monitor both Alabama and federal legislation for possible reinstatement of the exemption.

Learn More about Meeting Your Organization’s Labor and Tax Requirements

If you have questions about how your specific organization is impacted or what your reporting requirements may be, connect with your Warren Averett advisor directly.