In Alabama, processing payroll and calculating the corresponding taxes is mostly straightforward, though there are some nuances to pay attention to. The state levies local taxes in some areas, which can impact payroll tax calculations. With only one state payroll form, however, Alabama generally follows federal guidelines, making it one of the easiest states in which to run your company’s payroll.
Key Takeaways:
- Alabama has only one state payroll form: Employee’s Withholding Tax Exemption Certificate
- There are four local jurisdictions which levy income tax
- Alabama’s minimum wage mirrors federal law
Step-by-Step Guide to Running Payroll in Alabama
Alabama makes payroll easy for businesses by generally following federal guidelines. However, attempting to calculate payroll and withholding tax by hand could result in costly errors. Here are the basic steps you should follow to run payroll in Alabama.
Step 1: Set up your business as an employer. New companies may need to access the federal Electronic Federal Tax Payment System (EFTPS) to create a new Federal Employer Identification Number (FEIN). Your FEIN is required to pay federal taxes.
Step 2: Register your business with the State of Alabama. If your business is new, you need to register on the Alabama Secretary of State’s website. Any company that pays employees in Alabama must also register with the Alabama Department of Revenue.
Step 3: Create your payroll process. This entails deciding how often you’ll be paying employees and when, as well as what method you plan to use to issue paychecks (paper checks vs direct deposit), and how to update employee information. You can opt to process payroll by hand (not recommended), set up an Excel payroll template, or sign up for a payroll service to help you handle your Alabama payroll.
Step 4: Collect employee payroll forms. Every company that hires employees in Alabama must collect certain forms during the onboarding process. Each employee must complete I-9 verification and have on file a completed W-4 form—and, specifically, the state version of the W-4, called Employee’s Withholding Tax Exemption Certificate (Form A4).
Step 5: Collect, review, and approve employee time sheets. You must collect and approve time sheets before submitting payroll. You can use paper time sheets, but we recommend time tracking software that can save you time and ensure the accuracy of reported hours.
Step 6: Calculate employee gross pay and taxes. As stated earlier, calculating Alabama payroll by hand is not recommended. The state has a progressive income tax that quickly hits the top bracket. Most employees will pay the top state tax rate on the vast majority of their income. Learn more about how to calculate payroll if you need assistance.
Alabama Tax Rate | Taxable Income for Single Filers, Married Filing Separately, and Head of Household | Taxable Income for Married Filing Jointly |
|---|---|---|
2% | $0–$500 | $0–$1,000 |
4% | $501–$3,000 | $1,001–$6,000 |
5% | $3,001 and up | $6,001 and up |
Step 7: Pay employee wages, benefits, and taxes. Most companies today pay all employees through direct deposit, but paying via cash (not the best way) and paper check are also options. Alabama does not have a state minimum wage, so make sure that you are paying your employees at least the federal minimum wage of $7.25 per hour. You can pay your federal and Alabama state taxes online. If you use a benefits provider, it should work with you to make deductions simple, automatic, and electronic.
Step 8: Save your payroll records. Alabama has no laws requiring businesses to keep employee payment or company payroll records—so employers should follow federal requirements of keeping most payroll records for four years. If you need help with which records to keep and for how long, check out our article on retaining payroll records.
Step 9: File payroll taxes with the federal and state government. All Alabama state taxes need to be paid to the applicable state agency on the schedule provided, usually quarterly, which you can do online at the Alabama Department of Revenue website. To pay federal taxes, you can make those payments online using the EFTPS on one of the following two schedules:
- Monthly: When the IRS assigns you a monthly schedule, you need to deposit employment taxes on payments made during a calendar month by the 15th of the following month.
- Semiweekly: When the IRS assigns you a semiweekly schedule, you must deposit employment taxes for payments made Wednesday, Thursday, and Friday by the following Wednesday, and payments made Saturday, Sunday, Monday, and Tuesday by the following Friday.
Step 10: Process annual payroll reports. Every year, you will need to complete payroll reports, including all W-2 Forms and 1099 Forms. You must provide these forms to employees no later than Jan. 31 of the following year.
Download our free checklist to help you stay on track while you’re working through these steps:
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For general instructions on the basics of doing payroll, check out our guide on how to do payroll.
Alabama Payroll Laws, Taxes & Regulations
Understanding how to calculate payroll taxes and apply the related laws is vital to ensuring accuracy and compliance. To help you maintain compliance with payroll regulations, review the specific laws and regulations for doing payroll in Alabama below.
With few exceptions, most employers in the US must pay Federal Insurance Contributions Act (FICA) taxes. The current FICA tax rate for Social Security is 6.2% and 1.45% for Medicare. Both the employer and the employee will pay these taxes, each paying 7.65% for the combined Social Security and Medicare taxes.
Alabama Taxes
Like most states, Alabama has certain taxes that companies must pay.
Employer Unemployment Taxes
All businesses in Alabama must pay State Unemployment Tax Act (SUTA) taxes. The current wage base is $8,000, and rates range from 0.2% to 5.4%. All new employers in the state will pay a SUTA rate of 2.7% for their first year. Businesses that pay SUTA in full and on time can claim a tax credit of up to 5.4% on their Federal Unemployment Tax Act (FUTA) taxes.
To learn more about FUTA requirements, check out our guide on FUTA and Form 940.
Workers’ Compensation
Alabama businesses with five or more employees must carry workers’ compensation insurance. Workers’ compensation insurance provides benefits to employees who suffer on-the-job injuries. The state usually starts to pay these benefits a week or two after a worker is out of work because of their injuries and only covers their lost income and medical bills.
There are, however, exceptions to this requirement. If your company employs workers who fall into one of the following categories, you may not need to carry workers’ compensation insurance:
- Domestic workers
- Agricultural workers
- Casual employees
Income Taxes
The state does not have reciprocal agreements with any other state for income tax purposes. This means that employees may end up paying double taxes if they live in another state and work in Alabama.
Some localities in Alabama do levy local taxes. This can make your payroll calculations more complex if you are doing them by hand. As such, pay close attention to where employees live and work to ensure proper computations.
Jurisdiction | Tax Rate |
|---|---|
Bessemer | 1% |
Birmingham | 1% |
Gadsden | 2% |
Macon County | 1% |
Alabama Minimum Wage
Alabama adheres to the federal minimum wage. At $7.25 per hour, the minimum wage was last raised in Alabama in 2008. Businesses must pay tipped employees at least $2.13 per hour, provided that their tips get them to the hourly minimum wage. If not, the company must make up the difference.
Calculating Overtime
Alabama overtime rules follow the Fair Labor Standards Act (FLSA) requirements. Under the FLSA, all employers must pay employees 1.5 times their regular hourly wage for hours worked over 40 in a workweek.
Paying Employees
Alabama has no law requiring employers to pay employees on a certain schedule or at a certain frequency. It is best practice, however, to set a regular pay schedule—every other week, for example—and stick to it.
The state does not specify how employees must be paid. The most common forms of payment include:
If you need help keeping track of your payroll periods, use one of our free pay period calendars.
Pay Stub Laws
Alabama has no law requiring an employer to provide employees with a pay stub; however, we recommend doing so. If you do not use a payroll service, download one of our free pay stub templates to help you get started.
Alabama Paycheck Deductions
Alabama does not prohibit an employer from deducting wages from an employee, nor is there any law stating what deductions are allowable. Because there is no law, it is safe to deduct wages from an employee’s paycheck for:
- Cash shortages
- Damages, lost, or stolen company property
- Required work uniforms or tools
Please note that, according to the Department of Labor, a company cannot make deductions to an employee’s pay if those deductions would cause the employee to earn less than the federal minimum wage ($7.25 per hour) for that pay period.
Terminated Employees’ Final Paychecks
Alabama does not have any law stating when or how an employee must receive a final paycheck. So your best option is to pay any employee who has resigned or been laid off or terminated on the next regular payroll run. If you need to pay an employee immediately and aren’t currently using a service, then use one of our recommended ways to print a free payroll check.
Alabama HR Laws That Affect Payroll
Alabama does not have many state-specific HR laws—but you will still need to ensure that you are following the federal guidelines, which the state mostly follows.
Alabama New Hire Reporting
Every employer in Alabama must report new hires and any rehired employees to the Alabama Department of Labor New-Hire program. This report is used to enforce child support orders and must include the employee’s name, address, and Social Security number.
Meals & Breaks
The state has no law requiring employers to provide meal periods or breaks to employees 16 years of age or older. This means the federal rule applies, which does not require meal periods or breaks.
Alabama law does require employers to provide meal periods and breaks to minor workers. Employees aged 14 and 15 must receive a 30-minute break if they are scheduled to work at least five consecutive hours. These breaks can be unpaid.
Alabama Child Labor Laws
Under Alabama law, children aged 14 and 15 can work up to 40 hours per non-school week. They are restricted to no more than 18 hours of work in a school week and no more than three hours of work on a school day. They’re also not allowed to work before 7 a.m. or after 7 p.m. during the school week.
Meanwhile, minors aged 16 and 17 are not restricted to a certain number of hours, but they can’t work after 10 p.m. or before 6 a.m. during the school week and are restricted by industry. Alabama does not allow 16- and 17-year-olds to work in any of the following industries or professions:
- Mine or quarry
- Wrecking, demolition, and shipbreaking
- Roofing, scaffolding, and sandblasting
- Logging
- Sawmill
- Railroad
- Firefighter
- Distillery
- Manufacturing of explosives
Check out our guide to hiring minors for more insight on federal requirements for child labor.
Time Off & Leave Requirements
For the most part, Alabama does not have state-specific time off or leave laws, but there are federal guidelines you may need to follow.
Alabama Family Leave
Alabama follows the Family and Medical Leave Act (FMLA), which requires that all eligible employers provide up to 12 weeks of unpaid leave for employees who fall under a covered disability. This includes pregnancy and caring for an ill family member. The FMLA does not require that companies pay employees for this time out of work—but it does require that employers keep the employee’s job, or a substantially similar one, available for them when they return. Alabama does not provide for any additional leave under state law.
Paid Time Off
Alabama has no laws requiring employers to provide employees with paid time off (PTO). Companies in the state are free to create PTO policies and may include whether they pay out accrued and unused PTO when an employee leaves. Alabama does not require that companies do, so it’s a good practice to have this clearly defined in your company policy. The important thing is to follow the guidelines in your policy, or you can be held liable.
If you offer PTOs and need help calculating employees’ PTO accrual, use our free PTO calculator.
Holiday Leave
Alabama does not have any law requiring private companies to pay employees for holidays or an increased rate for working a holiday. A company may choose to do so and must comply with the FLSA.
Paid Sick Leave
Alabama has no law requiring employers to provide employees with sick leave, either paid or unpaid. Employers are free to create a sick leave policy and should adhere to its guidelines.
Voting Leave
Alabama law requires employers to give employees up to one hour of unpaid leave to vote, provided that the employee gives the employer reasonable notice. An employer does not have to provide leave if the polls open two hours before an employee is supposed to report to work or are open one hour after an employee leaves work.
Jury Duty Leave
Employers in Alabama must pay employees who are on jury duty leave; Alabama is one of only eight states to require this. A company cannot make the employee take PTO or unpaid time off to comply with a jury summons.
Bereavement Leave
There is no requirement in Alabama for businesses to provide employees with bereavement leave. Companies are free to create a policy if they choose and must abide by it.
Payroll Forms
Payroll forms can vary from state to state, and some have their own W-4, like Alabama. Fortunately, that’s the only one.
Alabama Payroll Forms
- Employee’s Withholding Tax Exemption Certificate: Employee withholding form; should be completed upon hire
Federal Payroll Forms
Here is a complete list and location of all the federal payroll forms you should need.
- W-4 Form: Provides information on employee withholdings so you can properly calculate and withhold federal and state income taxes
- W-2 Form: Used to report total annual wages for each employee
- W-3 Form: Used to report total annual wages for all employees; summary form of W2
- Form 940: To calculate and report unemployment taxes due to the IRS
- Form 941: Used to file quarterly income tax
- Form 944: Used to file annual income tax
- 1099 Forms: Provides information for non-employee contract work
For a more detailed discussion of federal forms, check out our guide on the federal payroll forms you may need.
Alabama Payroll Tax Resources
- Alabama Department of Revenue provides many forms, information on the latest laws and regulations, and other employer-specific information.
- Alabama Department of Labor offers support and resources to help businesses ensure compliance with unemployment and workers’ compensation plus other labor laws.
Bottom Line
One of the most straightforward states in which to run payroll is Alabama, as it almost completely mirrors federal regulations. While there are some local taxes you need to deal with, there is only one state-specific payroll form.
Other State Payroll Guides
Need to know how to pay employees in another state? Click on the state in our interactive map below to learn more:
