Employers are responsible for withholding Alabama income tax from wages that are subject to Alabama income tax. When an employee is not an Alabama resident, withholding obligations depend primarily on whether the employee performs services in Alabama and whether the wages are considered Alabama-source income.
General Rule
An employer should withhold Alabama income tax from wages paid to a nonresident employee only to the extent the wages are attributable to services physically performed in Alabama. If a nonresident employee performs no services in Alabama during the year, Alabama income tax withholding is not required solely because the employer is located in Alabama.
Statutory Exceptions
Alabama does have a relatively new 30-day safe harbor rule exempting Alabama earnings from taxation for certain out-of-state workers performing services in Alabama for 30 or fewer days in a calendar year.
There are specialized industry rules created by federal law, including air carriers, interstate railroads, interstate motor carriers, and water carriers. Employers in these specialized industries should refer to these special rules on page 2 of the Instructions for Employers and Withholding Agents.
Common Scenarios
Nonresident Working Entirely Outside Alabama:
If an employee resides outside Alabama and performs all services outside Alabama (including remote work from another state), the wages are not Alabama-source wages, and Alabama income tax withholding is not required.
Nonresident Performing Services in Alabama:
If a nonresident employee performs services in Alabama, the wages attributable to work performed in Alabama are subject to Alabama income tax withholding unless a statutory exception applies. Employers should maintain adequate records of workdays or compensation allocable to Alabama.
Employees Working in Multiple States:
For employees who perform services both inside and outside Alabama, employers should use a reasonable method to allocate wages based on services performed in Alabama. Payroll records should support the allocation methodology used.
Alabama Residents Working Outside Alabama:
Alabama residents are subject to Alabama income tax on all taxable income, regardless of where it is earned. Unless withholding is required for another state’s income tax, Alabama employers generally should continue withholding Alabama income tax from wages paid to Alabama residents working outside the state.
Employer Registration
Any employer with employees performing services in Alabama must register with the Alabama Department of Revenue for an Alabama withholding tax account and comply with applicable filing, payment, and reporting requirements. Registration must be completed and submitted online at https://myalabamataxes.alabama.gov.
Employee Forms
Employers should obtain a completed Alabama Form A-4 (Employee’s Withholding Exemption Certificate) from employees whose wages are subject to Alabama withholding and retain the form in their payroll records.
Recordkeeping
Employers should maintain documentation supporting withholding decisions, including:
- Employee state of residence.
- Primary work location.
- Dates and locations where services are performed.
- Allocation of wages among states, when applicable.
- Employee withholding certificates and payroll records.
Important Considerations
Alabama does not have broad reciprocity agreements with neighboring states that would eliminate withholding obligations based solely on an employee’s state of residence. However, the specialized industry rules mentioned above generally focus on the mobile employee’s state of residence.
Remote work arrangements should be evaluated based on where the employee actually performs services.
The Department will not follow the Alabama Tax Tribunal’s ruling in Bollinger v. State of Alabama Department of Revenue, Dkt. No. 22-390-LP (March 8, 2023), to the extent that ruling is inconsistent with this Notice.
The Department relies on the W2 information reported by employers to determine the employee’s Alabama source income. If an error is made in the amount of a nonresident’s wages earned in Alabama, the employer should issue a W2-C with the correct information. The W2-C should be submitted to both the employee and the Alabama Department of Revenue, Withholding Tax Section.
For more information on Alabama’s withholding tax requirements see the Instructions for Employers and Withholding Agents.
Contact
Income Tax Administration Division
Withholding Tax Section
PO BOX 327480
MONTGOMERY AL 36132-7480
334-242-1300
WithholdingTax@revenue.alabama.gov
