New Alabama Law Changes Payroll Tax Rules for Out-of-State Workers
Effective January 1, 2026, a new Alabama law will exempt certain out-of-state employees from state income tax and payroll withholding if they work in Alabama for 30 days or less in a year and meet specific requirements.
This law was created to simplify tax reporting for employers and to support employees who travel across state lines for short-term work assignments.
Which employees qualify?
There are four conditions that employees must meet to qualify for this benefit:
- The employee is paid for 30 or less days in Alabama during the calendar year
- The employee performs duties in more than one state during the calendar year
- The employee is not a paid professional athlete, professional entertainer or public figure
- The employee’s state of residence meets one of the following conditions:
- Provides a substantially similar tax exemption for short-term work in other states
- Does not impose an individual income tax
- The individual’s income is exempt from taxation by this state under the U.S. Constitution or by federal law.
What do employers need to do?
Once a non-resident reaches the 30-day threshold in Alabama, withholding is required retroactive to the first day.
The state will rely on the company’s “time and attendance” system that tracks where employees are providing services. This could include a system that requires employees to input time and track locations or a process where the company allocates wages for income tax purposes among states in which the employee performs the services.
Alternatively, if the company lacks a formal time and attendance policy and instead bases its approach on the employee’s location, no penalties will be imposed—provided the employer can demonstrate that it did not deliberately attempt to avoid taxation when the employee rendered services in Alabama.
Traveling days are also not included if employees do not work during those days. If an employee works in both his or her home state and Alabama on the same day, the state where most hours were worked determines tracking.
Employers should review their time-tracking systems and consult with payroll and tax professionals to ensure compliance before the law takes effect. To learn more about how this change will impact your specific company, contact your Warren Averett advisor directly.
