Alabama’s 2025 legislative session ended without extending the overtime exemption from income tax. The overtime exemption expires on June 30, 2025. Overtime compensation paid on or after July 1, 2025 will be subject to Alabama income tax. The Alabama Department of Revenue released a Notice on June 4, 2025, detailing the expiration’s impact on employers.
Beginning July 1, 2025, employers required to withhold income tax must also withhold on overtime wages paid. For amounts paid on or after July 1, 2025, employers no longer need to report overtime information on quarterly (A-1) or monthly (A-6) withholding returns. This will first impact the Q3 A-1 and July A-6. Alabama has not yet released an updated file layout accounting for this change. However, exempt overtime paid from January 1, 2025 through June 30, 2025 must still be reported in Box 14 of the employee’s 2025 W-2 using “Exempt OT Wages” as the indicator. Do not include this exempt overtime income in Box 16.
To review the aforementioned notice from the Alabama Department of Revenue, click here.
