Overtime Pay Exemption*

Reporting Guidance and FAQs

For the tax year beginning on or after January 1, 2024, overtime pay received by a full-time hourly wage paid employee for hours worked above 40 in any given week are excluded from gross income and therefore exempt from Alabama state income tax. Tied with this exemption are employer reporting requirements to ALDOR. Employers are required to report the total aggregate amount of overtime paid and the total number employees who received overtime pay.

Overtime Pay Exemption: Utilizing My Alabama Taxes and

Existing Forms for Employers to Report

Employers are required to report to ALDOR in two ways:

• A one-time report which includes the aggregate amount of overtime paid during 2023 along with the number of full-time hourly employees who received the pay.
• A monthly/quarterly report of the same data requirement beginning with the 2024 tax year tied to the employer’s reporting of withholding tax.

WHO must report to ALDOR?

• All employers that are required to withhold Alabama tax from the wages of their employees.

WHAT overtime qualifies as exempt?

• Overtime pay received beginning on or after January 1, 2024, and before June 30, 2025.
• Overtime pay based on the act is amounts received by a full-time hourly wage paid employee as compensation for work performed in excess of 40 hours in a week, regardless of the rate paid for the hours over 40 in a week or how it is calculated

WHEN and WHAT do I report?

• One-Time Report – Historical 2023 Overtime Data:
  • Due by January 31, 2024.
  • Employers are required to report the following:
    1. Aggregate amount of overtime paid during 2023 calendar year.
    2. Total number of full-time hourly employees who received overtime pay in 2023.
• Monthly/Quarterly Reporting Beginning for 2024 Tax Year:  
  • Reported with Form A-6 (monthly) and Form A-1 (quarterly) withholding returns.
  • Employers are required to report the following:
    1. Aggregate amount of overtime paid (new exempt portion) during the period (month/quarter).
    2. Total number of full-time hourly employees who received overtime pay.

HOW do I report?

You will report using forms or processes already in place in your My Alabama Taxes account.

• One-Time Report – Historical 2023 Overtime Data:
  • Two options for reporting through My Alabama Taxes:
    • If you ARE NOT a Bulk Filer (your typical employer): A link will be provided within Form A-3 that routes you to manually enter the required data.
    • If you ARE a Bulk Filer: A one-time bulk file process separate from the current Form A-3 bulk file process will be needed. *For layout instructions, please click on the following links:
    • OTReportingBlkFilingLayoutWeb.docx (Updated: 10/16/2023)
    • OTReportingBlkFilingLayout.xls (New: 10/17/2023)
      
• Monthly/Quarterly Reporting Beginning for 2024 Tax Year: 
  • Two options for reporting through My Alabama Taxes:
    • If you ARE NOT a Bulk Filer (your typical employer): You will input the data into the new field boxes on the Form A-6 and A-1 withholding returns.
    • If you ARE a Bulk Filer: You will input the data utilizing the current bulk file for the A-6 and A-1 return by adding two new required text fields. *For layout instructions, please click on the following link:
    • A1A62024Web File Layout (New: 10/18/2023)
    • A1A6BlkFilingLayout2024 Excel File (New: 1/12/2024)

Will manual paper forms be adjusted?

• Due to the small number of manual paper forms received by ALDOR, the A-3, A-6, and A-1 paper forms will not be adjusted for this reporting. We encourage all employers to utilize and file through My Alabama Taxes. For information on registering for a My Alabama Taxes account, please visit myalabamataxes.alabama.gov.

Overtime Pay Exemption: Withholding Tax FAQ

What overtime qualifies as exempt?

• Overtime pay received beginning on or after January 1, 2024, and before June 30, 2025.
• Overtime pay based on the act is amounts received by a full-time hourly wage paid employee as compensation for work performed in excess of 40 hours in a week, regardless of the rate paid for the hours over 40 in a week or how it is calculated.

For withholding tax purposes, only wages subject to Alabama withholding are used in calculating when the 40-hour weekly threshold has been exceeded. This applies both to employees who are residents of Alabama and to employees who are non-residents.

Questions

• If an Alabama employee (resident) works in multiple states which require withholding and the employees’ wages exceed 40 hours, would the exemption apply?

For withholding tax purposes for an Alabama resident, wages earned in other states that are subject to that other state’s withholding tax are not subject to Alabama withholding tax. Since the wages are not subject to Alabama withholding and the employer is not collecting and remitting Alabama withholding taxes on those wages, they are not used in the calculation of determining the 40-hour threshold for Alabama withholding purposes.

• If a non-resident is earning wages while in Alabama, would the overtime exemption apply even though the total Alabama hours are less than 40?

For withholding tax purposes only wages subject to Alabama withholding above 40 hours are used in the withholding tax determination for non-residents.

• If an employer considers hourly employees full time at less than 40 hours per week (for example 35), at what point would wages above this threshold be exempt from taxation?

Exempt overtime wages would begin once the employee exceeds more than 40 hours of work in that week. Regardless of the rate of pay the employee will be paid after 35 hours, the wages earned between 35 and 40 hours is considered taxable income to the employee. For reporting purposes, only the exempt wages above 40 hours should be included in overtime reporting.  

• If an employee is paid overtime for working more than 8 hours in one day, would these overtime wages be exempt if the employee does not exceed a 40 hour work week?

No, only the wages that exceed 40 hours in the work week will qualify as exempt and be used for exempt overtime reporting purposes.

• Does paid time off count toward the 40 hour work week?

No, paid time off does not count toward overtime. Under the Fair Labor Standards Act (FLSA), sick time, vacation time, or anytime an employee is not physically working does not count as time worked. In determining if an employee has worked more than 40 hours, only hours physically worked by the employee will qualify as hours worked toward the 40 hour threshold. Paid time off hours will need to be removed in determining the total hours worked for the week.

• Will an hourly part time or seasonal employee qualify for exempt overtime wages if they occasionally work over 40 hours in the week? 

Yes, wages earned above 40 hours for the week will qualify for exemption and reporting purposes if earned by an hourly part time or seasonal employee.

• Will the overtime earned by full-time salaried nonexempt employees such as law enforcement or emergency responders qualify for exemption? Or employees who work  schedules other than an hourly work week, such as 7-on and 7-off?

No, only full time hourly employees will qualify. Hybrid plans where an employee is salaried nonexempt but can also earn overtime will not qualify for the overtime exemption.  If an employee is paid by the hour and works more than 40 hours in one week, any compensation received for the hours worked in excess of 40 hours is exempt. Whether the employer considers the hours to be “overtime” hours is not relevant for determining the exemption. The statute also does not provide any adjustment for a work schedule that exceeds one week in duration; therefore, multiple weeks cannot be averaged to determine what wages are exempt. The statute is clear in that it applies to full time hourly employees.

• Is the amount of differential pay or the amount of overtime paid above regular pay the only amount exempt or is it the full amount earned above 40 hours by a full time hourly employee?

The full amount paid above 40 hours will qualify for exemption and reporting purposes if paid to a full time hourly employee. The amount of the pay is not a determining factor for the exemption whether time and a half, double time, or other method of payment if by the hour.

• Will an amount of overtime earned on or before June 29, 2025, but paid after this date qualify for exemption?

No, amount must be received/paid prior to June 30, 2025, to qualify for the exemption and reporting purposes.

• Will earnings other than full time hourly wages qualify for exemption such as those that are paid by the mile or other schedules where the hours are averaged for a period such as biweekly, semi-monthly or monthly?

No, a mileage basis compensation is not covered under this legislation. Only wages earned by full time hourly employees will qualify for exemption and reporting  purposes. Additionally, commissions and bonuses paid in addition to an hourly wage are not exempt.

• For reporting purposes, if an employee receives exempt overtime wages multiple times within a reporting period, (ex: paid weekly and receives overtime 4 times within the monthly reporting period) is the employee reported once for the period or multiple times?

The employee is only reported once for each reporting period regardless of the frequency of overtime paid to them. There is a distinct employee count for each reporting period. Each employee who receives overtime for the reporting period is included only once in the report.

Sequence of Deductions and Exclusions

To compute Alabama withholding tax, take off pre-tax deductions as you currently do, then exclude the overtime wages, which leaves the gross taxable amount subject to Alabama withholding tax.

Computation of withholding tax when an employee has exempt overtime wages. The amounts used in this example are for informational purposes only and do not reflect actual amounts.
Total Gross Alabama wages for the current payroll period.		$ 5,600
Less: Pre-tax deductions (401k, 125 Cafeteria Plan, etc. computed on Gross Alabama Wages).		$   -873
Less: Exempt overtime wages.		$   -750
Wage amount to be used in Step 1 of the Formula for Computing Alabama Withholding Tax. Please see the Withholding Tax Tables and Instructions for Employers for additional information.		$ 3,977

Form W-2 Reporting in Box 14

ALDOR proposes that exempt overtime wages be reported in Box 14 of employees Form W-2 using “EX OT WAGES” as the indicator: for example, EX OT WAGES- $15,250

If space becomes an issue in Box 14, this may be abbreviated (e.g., EX OT $15,250), or the text may be wrapped.

Note – Box 14 reporting of Alabama exempt overtime begin with the 2024 tax year, do not enter the historical 2023 overtime should not be reported on the 2023 W2.

Amending Exempt Overtime Reported

• Can I update the 2023 overtime exemption data on the A3 after the bulk file is done? If so, how would they do that? 

Yes, an employer can update the overtime exemption data through the following options (only after the A-3 and W-2’s have been filed for 2023):

• Send a My Alabama Taxes message through the employer’s My Alabama Taxes account to request the overtime exemption data be updated.
• Send an email to withholdingtax@revenue.alabama.gov to request the overtime exemption data be updated.

• My A3 information was bulk filed for me, however my company’s 2023 historical OT exemption data was not. How do I update and report my company’s 2023 historical OT exemption data?

Log into your My Alabama Taxes account, and send a message with the 2023 historical OT exemption data. An ALDOR agent will assist in updating the data. You may also email withholdingtax@revenue.alabama.gov with your withholding tax account number and the 2023 historical OT exemption data.

• I logged into My Alabama Taxes and filed my A1 or A6. However, I input the wrong numbers for the overtime exemption data. How do I correct it?

Log into your My Alabama Taxes account, and send a message with the corrected OT exemption data. An ALDOR agent will assist in amending and updating the data. You may also email withholdingtax@revenue.alabama.gov with your withholding tax account number and the corrected OT exemption data.

• The bulk file submitted for my A1 or A6 had the wrong numbers for the overtime exemption data. How do I correct it? 

Log into your My Alabama Taxes account, and send a message with the corrected OT exemption data. An ALDOR agent will assist in amending and updating the data. You may also email withholdingtax@revenue.alabama.gov with your withholding tax account number and the corrected OT exemption data.

• Will I be assessed a penalty if I don’t file the 2023 historical overtime exemption data?

There is no specific penalty associated with the overtime exemption data reporting. However, normal penalties apply to the filing requirements of the A3, A1, and A6 returns which house the overtime exemption data fields.

ALDOR is committed to providing employers and business with guidance and information related to the overtime pay exemption. If you have additional questions related to withholding and reporting of exempt overtime pay, please email withholdingtax@revenue.alabama.gov.

*Act 2023-421 was signed into law on June 8, 2023.