Easily manage employment in Alabama

Payroll management in Alabama 

Alabama has a diverse economy driven by industries such as manufacturing, aerospace, automotive, agriculture, and technology. As a business-friendly state with relatively low tax rates and fewer regulatory burdens than other states, Alabama attracts employers seeking an affordable operating environment. However, businesses must navigate specific state payroll regulations, tax requirements, and compliance obligations to ensure smooth payroll operations. Here’ what you need to know about Alabama's payroll system to avoid penalties, ensure compliance, and maintain employee satisfaction.

Payroll breakdown in Alabama 

Alabama employers must adhere to both federal and state payroll regulations when processing employee wages, taxes, and benefits. Below is an overview of key payroll components in the state:

Minimum wage and overtime 

• Minimum wage: Alabama does not have a state-mandated minimum wage. Employers must adhere to the federal minimum wage of $7.25 per hour under the Fair Labor Standards Act (FLSA).
• Overtime rules: Alabama follows federal overtime laws, requiring employers to pay 1.5 times an employee’s regular rate for hours worked beyond 40 hours in a workweek, unless an exemption applies.

State income tax

• Alabama has a graduated income tax system, with rates ranging from 2% to 5% depending on income levels:
  • 2% on the first $500 of taxable income for single filers ($1,000 for joint filers)
  • 4% on taxable income between $501 and $3,000 for single filers ($1,001 to $6,000 for joint filers)
  • 5% on taxable income exceeding $3,000 for single filers ($6,000 for joint filers)
• Employers are responsible for withholding Alabama state income tax from employee wages and remitting it to the Alabama Department of Revenue.

Unemployment insurance (UI) tax

• Employers must pay Alabama unemployment insurance (UI) tax to the Alabama Department of Labor (ADOL). The tax rates for new employers generally start at 2.7% and can vary based on an employer's experience rating.
• The wage base for UI tax in Alabama is $8,000, meaning taxes are only applied to the first $8,000 of an employee’s wages per year.

Workers’ compensation

• Alabama requires employers with five or more employees to carry workers’ compensation insurance, except for certain exempt industries (e.g., agriculture, domestic services).
• The Alabama Department of Labor enforces workers’ compensation regulations to ensure employees receive benefits for workplace injuries or illnesses.

Payroll tax filing and payment deadlines 

• Alabama employers must register for an Employer Account Number with the Alabama Department of Revenue (ADOR) for state withholding tax.
• Employers must file withholding tax returns quarterly (Form A-1) or annually (Form A-3) depending on their assigned filing frequency.
• UI tax reports must be submitted quarterly to ADOL.
• Payroll tax deposits can be made electronically through My Alabama Taxes (MAT), the state’s online tax system.

Alabama payroll quick facts: Important considerations for employers 

• No Local Income Tax: Unlike some states, Alabama does not impose local income taxes on wages, simplifying payroll calculations for employers.
• Right-to-Work State: Alabama is a right-to-work state, meaning employees cannot be required to join or pay dues to a labor union as a condition of employment.
• Final Paycheck Rules: When an employee leaves a job (voluntarily or involuntarily), Alabama does not have specific laws requiring employers to pay final wages by a certain deadline. However, best practice is to issue final paychecks on the next scheduled payday.
• New Hire Reporting: Employers must report new hires to the Alabama New Hire Reporting Center within seven days of the hire date to aid in child support enforcement efforts.
• Paid Leave Policies: Alabama does not have a statewide requirement for paid sick leave or paid family leave. Employers may voluntarily provide these benefits to employees.
• Payroll Recordkeeping: Employers must maintain payroll records, including wage and hour information, for at least three years to comply with FLSA and state labor laws.
• Business-Friendly Tax Environment: Alabama offers various tax incentives for businesses, including credits for new job creation and investment in economically distressed areas.

Run payroll in Alabama with Remote 

Managing payroll in Alabama involves compliance with both state and federal regulations. Employers must stay informed about tax rates, wage laws, and reporting requirements to avoid penalties and ensure smooth payroll processing.

For businesses looking to simplify payroll management, Remote’s payroll solutions provide automated payroll processing, tax filing, and compliance support tailored to Alabama’s requirements. With Remote Payroll, you can pay anyone, anywhere — from your team in the office to your team abroad. 

To see just how easy global payroll can be, book a demo today.