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As of June 30, 2025, Alabama’s temporary state income tax exemption on overtime wages will expire, marking a notable shift in tax compliance obligations for both employers and employees. The exemption, initially introduced to offer financial relief amid inflationary pressures and to encourage workforce participation, will no longer apply to any overtime pay disbursed after this date.
Beginning July 1, 2025, all overtime compensation will be fully subject to Alabama state income tax, aligning it once again with the broader taxable wage base. This change introduces new considerations for payroll departments, human resources professionals, and employees who have relied on increased take-home pay under the exemption.
What Employers Must Do Now
Employers will need to finalize their reporting of exempt overtime wages with their regular monthly or quarterly withholding tax filings. The reporting obligation ends once all overtime wages earned under the exemption (i.e., through June 30, 2025) are documented. However, employers must still:
- Include the exempt overtime wages paid during the exemption period in Box 14 of Form W-2, labeled as
"EX OT WAGES". - Exclude those exempt wages from Box 16, which reports state taxable wages.
This dual-reporting requirement ensures transparency without distorting the taxable income figures used by the Alabama Department of Revenue (ADOR).
Implications for Employees
Workers in Alabama who have benefited from this temporary relief should anticipate a noticeable decrease in net pay from overtime hours post-June 2025. Tax planning, particularly for hourly workers who rely heavily on overtime, may need to be adjusted to reflect this tax change.
Broader Context
This move is part of a larger conversation across U.S. states regarding labor incentives, wage taxation, and temporary relief programs. While Alabama’s exemption was never intended to be permanent, its expiration comes at a time when wage growth remains uneven across sectors.
Next Steps
Employers should communicate proactively with employees, update payroll systems, and coordinate with tax advisors to ensure compliance before the exemption sunsets. For additional guidance, visit the Alabama Department of Revenue’s official page or contact the Withholding Section directly.
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