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Set up and track Alabama overtime exemption

by Intuit•8• Updated 2 months ago

Learn how to set up QuickBooks Payroll to track overtime pay exempt from Alabama (AL) withholding tax.

Effective January 1, 2024, if an hourly employee works more than 40 hours in a week, the pay from those extra hours is exempt from AL income tax. 

Note: Starting October 1, 2024, the exemption includes nonexempt salary employees.

Here’s more about the state law, how to track it and report it in QuickBooks Online Payroll and QuickBooks Desktop Payroll.

Understand AL overtime exemption

  • Alabama has amended the Overtime Exemption Act. The change extends the exemption to include salaried nonexempt employees.
  • Starting October 1st, 2024, nonexempt employees (both hourly and salary) will be exempt from Alabama income tax withholding for any overtime pay earned for additional hours worked beyond the standard 40-hour workweek.
  • The exemption, covers hourly employees starting January 1, 2024, and includes all nonexempt salaried workers starting October 1, 2024.
  • Work performed over 40 hours in a week is exempt, whether it’s paid as overtime or regular pay.
  • The exemption applies to all paycheck dates on or after January 1, 2024 through June 30, 2025. 
  • Overtime pay earned in excess of 8 hours a day under collective bargaining agreements aren’t exempt if your employees don’t work more than 40 hours in the week. 
  • This info needs to be reported on either a monthly or quarterly basis, and on Form W-2. 

Find out more on the Alabama Department of Revenue website. 

Track the AL overtime exemption

Note: The AL-OT Withholding exempt item will show 0.00 on the employee's paychecks / pay stubs. This item is for tracking/filing purposes only. To see the wage totals, run a Payroll Item Detail report.

Select your product below for instructions. 

Note: Not sure which payroll service you have? Here's how to find your payroll service.

Step 1: Calculate the tax-exempt pay amount

Manually calculate the tax-exempt pay amount and add it to your employees when you create your payroll. 

Example tax-exempt calculation:

Your hourly employee is paid $15.00/hr. Their overtime (OT) rate is 1.5 x $15.00 = $22.50/hr. Your employee is paid every other Friday (bi-weekly).  

  • Week 1 your employee worked 42 hours
  • Week 2 your employee worked 40 hours
  • Tax-exempt hours for the pay period = 2 (from week 1)
  • 2 hours x 22.50/hr (OT rate) = $45.00 exempt pay amount

Step 2: Enter the tax-exempt amount in QuickBooks

The amounts will flow to the paycheck calculation and will reduce the amount of AL income tax withheld.

  1. Go to Payroll, then Employees.
  2. Select Run Payroll. 
  3. From your employee list, select Actions, then Add tax-exempt pay.
    Add tax-exempt pay action
  4. Enter the tax-exempt pay dollar amount. 
  5. Select Add.
  6. Repeat steps 3 - 5 for each employee with tax-exempt amounts

Auto Payroll

If you have employees enrolled in Auto Payroll that qualify for Alabama overtime pay exemptions, follow these steps to add these exemptions to your paychecks.

If your paycheck hasn't been processed yet, you can add them in before the paycheck runs. 

  1. Select Settings ⚙, then Payroll Settings.
  2. In the Auto Payroll box, select Edit ✎.
  3. Select Update upcoming payroll in the pay schedule you want to edit.
  4. Next to the employee you want to edit, select Actions ⋮, then Add tax-exempt pay.
    Add tax-exempt pay action
  5. Add in the value that needs to be exempted, then select Save.

If your paycheck has been processed, you can edit your paycheck to include the exemptions.

  1. Go to Payroll, then select Employees.
  2. Select Paycheck list.
  3. Next to the employee you want to edit, select Actions ▼, then select Edit.
  4. Next to AL tax-exempt pay this period select Edit.
  5. Add in the value that needs to be exempted, then select Save.

When you create your next payroll, you may see a new Payroll Correction item to adjust for over-withheld taxes.

View the tax-exempt amounts

You can view the amounts exempted in the following places:

  • Paycheck list
    1. Go to Payroll, then Employees. 
    2. Select Paycheck list
    3. Select the paycheck you want to view.  Or you can select the dropdown ▼ and edit the check if it’s eligible for correction. 
  • Payroll Details report
    1. Go to Reports. 
    2. In the Find report by name field, enter Payroll details. 
    3. Enter the paycheck date or period you want to view. 

Step 1: Add the new AL OT Withholding Exemption payroll item (one-time only)

  1. Get the latest payroll update.  The Add Item Wizard will launch and take you through setting up the AL - OT Withholding Exemption payroll item.
  2. Go to Employees, and select Employee Center.
  3. Double-click your employee.
  4. Select Payroll Info.
  5. Select Taxes, then the Other tab. Add the new AL - OT Withholding Exemption item. 
  6. Select OK. 
  7. Repeat steps 3-6 for each full-time hourly employee. 

Step 2: Run payroll 

When you create your payroll, enter each employee’s overtime hours using the overtime payroll items you normally use (ex: OT 1.5, OT 2.0). QuickBooks will automatically calculate and exempt the amount of AL withholding on your employees’ paychecks. 

Note: If your QuickBooks Desktop isn’t on the latest release, you may need to correct any paychecks you've run so far this year. 

FAQs

Not necessarily. The AL withholding tax calculation includes Federal withholding tax as a deduction. This can reduce the overall amount of AL withholding tax.

Exempt overtime wages would begin once the employee exceeds 40 work hours in a week. Create a new overtime pay item to pay the non-exempt overtime.

  1. Select Lists, then Payroll Item List.
  2. Select the Payroll Item ▼ dropdown, then New.
  3. Select Custom Setup, then Next.
  4. Select Wage, then Next.
  5. Select the Hourly Wages wage type, then Next
  6. Select Regular Pay, then Next. 
  7. Name the new Pay Item (e.g., AL NonExempt OT)
  8. Select Expense Account and then click Finish.

The overtime pay has to be separated by state/location. Create a new pay item (ex: Georgia OT) and manually adjust the overtime rate.

  1. Select Lists, then Payroll Item List.
  2. Select the Payroll Item ▼ dropdown, then New.
  3. Select Custom Setup, then Next.
  4. Select Wage, then Next.
  5. Select the Hourly Wages wage type, then Next
  6. Select Regular Pay, then Next. 
  7. Name the new Pay Item (e.g. GA OT 1.5)
  8. Select Expense Account and then click Finish.

Report the tax-exempt amounts to AL 

This info needs to be reported on either a monthly (AL A-6) or quarterly (AL A-1) basis, and on Form W-2.

For 2023, there’s a one-time reporting requirement. The report needs the total number of full-time hourly employees who were paid overtime, and the total amount of overtime paid in calendar year 2023.

If you’re set up to have QuickBooks automatically pay and file your payroll taxes, or you do them electronically through QuickBooks, we handle the reporting to Alabama for you. 

If you pay and file directly to the agencies yourself, or your tax setup isn’t complete, you’ll need to send the form to AL Dept. of Revenue yourself. 

If you use QuickBooks Desktop Payroll Assisted, we handle the reporting to Alabama for you. 

If you use QuickBooks Desktop Payroll Enhanced, the info is pre-populated on the tax forms for you to file with Alabama. 

QuickBooks Desktop Payroll AssistedQuickBooks Desktop Payroll BasicQuickBooks Desktop Payroll EnhancedQuickBooks Desktop Payroll StandardQuickBooks Online Payroll CoreQuickBooks Online Payroll EliteQuickBooks Online Payroll Premium

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