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Overview of Employer Payroll Tax Responsibilities in Alabama

Federal Context

Employers must first satisfy federal payroll taxes—FICA (Social Security & Medicare) and FUTA (federal unemployment)—before addressing state obligations.

State-Level Obligations

• State Income Tax (SIT) Withholding: Employers withhold progressive-rate income tax from wages.
• State Unemployment Insurance (SUI): Employer-only contributions fund unemployment benefits.
• Local Occupational Taxes: Municipalities impose varied rates and rules on wages earned within their jurisdictions.

Employer Registration Requirements

Register with the Alabama Department of Revenue for SIT withholding and with the Alabama Department of Labor for SUI. Local taxes require direct registration with each municipal government.

Alabama State Income Tax (SIT) Withholding

2025 Tax Rates and Brackets

Filing Status	Taxable Income Bracket	Tax Rate
Single / Head of Household / Married Filing Separately	$0 – $500	2%
Same statuses	$501 – $3,000	4%
Same statuses	Over $3,000	5%
Married Filing Jointly	$0 – $1,000	2%
Same status	$1,001 – $6,000	4%
Same status	Over $6,000	5%

Standard Deductions and Personal Exemptions for 2025

Current figures (subject to final ADOR publication): $4,500 standard deduction for single filers; $11,500 for married filing jointly. Personal exemptions are $1,500 per filer; dependent exemptions vary by income level.

Item	Single Filers	Married Filing Jointly	Dependent Exemption
Standard Deduction	$4,500	$11,500	—
Personal Exemption	$1,500	(Not specified; typically double)	—
Dependent Exemption	—	—	$1,000 (wages ≤ $50k) $500 ($50k–$100k) $300 (> $100k)

Withholding Requirements and Employee Forms (Form A-4)

Employees complete Form A-4 to declare filing status and allowances. Alabama does not permit zero withholding election. Supplemental wages (bonuses) carry a flat 5% withholding.

Employer Reporting and Remittance

Key forms and due dates:

Tax Type	Form	Frequency	Due Date
SIT	A-6 (Monthly Return)	Monthly	15th of following month
SIT	A-1 (Quarterly Return)	Quarterly	Apr 30, Jul 31, Oct 31, Jan 31
SIT	A-3 (Annual Reconciliation + W-2s)	Annually	Jan 31
SUI	Quarterly Contribution & Wage Report	Quarterly	Last day of month after quarter

Penalties for Non-Compliance (SIT)

Late filing: greater of 10% of tax due or $50. Late payment: 10% of delinquent tax. Interest accrues per federal rate. $50 penalty per inaccurate Form A-4; $50 per missing/late W-2 on A-3.

Alabama State Unemployment Insurance (SUI) Tax

2025 Taxable Wage Base

SUI applies to first $8,000 of each employee’s annual wages; no further tax thereafter.

2025 SUI Tax Rates

New employers: 2.70%. Experienced employers: 0.20% – 6.80% (includes 0.06% ESA), determined by benefit-charge experience and trust-fund health.

Item	2025 Value/Rate
Taxable Wage Base	$8,000
New Employer Rate	2.70%
Experienced Rate Range	0.20% – 6.80% (incl. ESA)

Employer Reporting and Payment

File quarterly reports via the Department of Labor’s eGov portal by the last day following each quarter.

Specific Employer Categories

• Non-Farm Employers: liable if ≥1 employee in 20+ weeks or wages ≥ $1,500/quarter.
• Agricultural Employers: liable if ≥10 ag workers in 20+ weeks or wages ≥ $20,000/quarter.
• Household Employers: liable if wages ≥ $1,000/quarter.

Penalties for Non-Compliance (SUI)

State late-filing and late-payment penalties and interest apply; timely electronic filing is recommended.

Local Payroll Taxes: Occupational Taxes

Municipal occupational taxes require separate withholding, remittance, and reporting to each locality.

City	Occupational Tax Rate	Remittance Frequency
Auburn	1% of gross wages	Quarterly
Bessemer	1%	—
Birmingham	1%	—
Gadsden	2%	—
Leeds	1% of gross earnings	Monthly

Employers must identify all work locations, contact each finance department, and configure payroll systems accordingly. Penalties vary by ordinance (e.g., Leeds: 12% interest + 10% penalty).

Significant Tax Changes for 2025 and Beyond

Overtime Pay Exemption Expiration

Overtime exemption ends June 30, 2025. Resume SIT withholding on eligible overtime paid on or after July 1, 2025, and update payroll calendars and systems.

Mobile Workforce Legislation (H.B. 379)

Effective January 1, 2026: non-resident employees working ≤30 days in-state are exempt if conditions met; beyond 30 days, full withholding applies retroactively. Employers must track days worked in Alabama.

Decoupling from Federal IRC Section 174

As of January 1, 2024, Alabama allows immediate deduction or pre-TCJA treatment of R&E expenditures, affecting overall tax planning.

Other Tax Changes

• Groceries sales tax cut to 2% and new exemptions begin September 1, 2025.
• Tax Tribunal jurisdiction and appeal deadlines extended October 1, 2025.

Special Considerations for Alabama Employers

Exemptions from SIT Withholding

Household help, farm laborers, ministers, and merchant seamen are exempt from mandatory withholding but remain personally liable. Employers may voluntarily withhold if registered.

Record-Keeping Requirements

Retain payroll and tax records for multiple years; local ordinances (e.g., Leeds: five years) may specify retention periods.

No State-Mandated Disability Insurance Payroll Tax

Alabama relies on employer-funded Workers’ Compensation for disability coverage. No separate state payroll tax for disability insurance.

Strategic Recommendations for Compliance

• Monitor Official Sources: Regularly review the ADOR B.E.S.T. library and Department of Labor updates.
• Ensure Accurate Employee Data: Verify Form A-4 details, work locations, and classifications in your payroll system.
• Leverage Technology: Adopt payroll software that automates multi-jurisdictional withholding, tracks legislative changes, and files electronically via MAT and eGov portals.
• Manage Local Taxes Diligently: Establish processes to identify jurisdictions, register, and comply with occupational tax ordinances.
• Prepare for Legislative Changes: Update systems for the overtime exemption expiry and mobile workforce rules before their effective dates.
• Seek Professional Advice: Consult Alabama tax specialists for complex scenarios or multi-state operations.

Conclusion

Alabama’s 2025 payroll tax landscape combines progressive SIT withholding, employer-funded SUI, and fragmented local occupational taxes with significant mid-year and upcoming rule changes. Employers who proactively monitor official updates, maintain accurate employee data, leverage modern payroll technology, and address local tax obligations will navigate this complexity with confidence, minimize risks, and maintain compliance.