Payroll tax in Alabama: What employers need to know [2023]

Albert Einstein didn’t mince words when it came to taxes, describing them as the hardest thing in the world to understand. He wasn’t wrong. And if you’re a business owner in the state of Alabama, you’ll need to figure out US and state taxes. Not only do you have to deal with Federal Insurance Contributions Act (FICA) requirements like Medicare taxes and Social Security, but there are also state and local payroll taxes to consider. These taxes vary from state to state, so it’s vitally important to understand the tax regulations where your workers reside. 

Alabama uses a progressive tax system, which gives it added complexity. As your employees' income increases, their tax rates will rise accordingly, leading to increased tax liability. If your business is thriving and you’re bringing on more staff, your employer tax contributions will increase, as will the amount you must deduct from your employees’ paychecks.

It doesn’t matter if you’re managing a large global operation with thousands of employees or a small business with just a few workers—you must understand the state and federal payroll taxes: who they apply to, what the rates are, and when they need to be filed. Here’s what you need to know. 

The 2 Alabama payroll taxes

The responsibility for overseeing state-level payroll taxes falls under the jurisdiction of the Alabama Department of Revenue (ALDOR). Employers in Alabama are required to pay taxes on all employees. You must register new hires with ALDOR within seven days of their employment or recall. There is a $25 fine for failing to report on time. 

State unemployment insurance tax (SUI)

The Alabama State Unemployment Insurance (SUI) tax is an employer-paid tax designed to finance temporary unemployment benefits for people who find themselves unemployed due to no fault of their own, like layoffs. Rates and taxable wages are determined by the Department of Labor on an annual basis. New employers pay 2.7% for at least a year, and subsequent rates are determined by an employer’s experience rating, which is based on their unemployment claims history and taxes paid. Rate notifications are typically available in December. 

Under the Federal Unemployment Tax Act (FUTA), Alabama employers are required to pay both federal and state unemployment taxes.

State withholding tax 

Alabama’s state withholding tax is used to fund a variety of programs and services in the state, including public safety, healthcare, and education. Employers withhold this tax from their employee’s pay and remit it to the Alabama Department of Revenue. Employees must fill out an Employee’s Withholding Tax Exemption Certificate (Form A-4, the state version of IRS Form W-4) so that the employer can calculate state income tax withholding correctly.

Employers can determine the amount of an employee’s withholding tax by using one of two methods: 

• Method A uses wage tables to figure out the amount to withhold. The tables are based on the pay period, filing status (married filing, single filing, etc.), number of dependents, exemptions, and adjusted gross income. 
• Method B is more complex and utilizes a formula that calculates the correct amount based on wages, filing status, number of dependents, and exemptions. This method should be used by employers using a computer program for these calculations. It must be used if the employee’s number of dependents or salary exceeds the amounts listed in the tables.

You can find the tables and formula worksheet in this document. Note that some jurisdictions levy local taxes. It’s important to know if you or any of your employees are subject to these taxes.

Running the payroll process in Alabama can be difficult. You need to be familiar with ever-changing tax regulations and know your way around tax tables and stacks of federal and state tax forms. You’ll likely face angry employees and compliance penalties if you don't get it right. But Rippling’s payroll compliance software makes running payroll a breeze. Rippling crunches the numbers automatically, calculates your taxes, and files your tax documents and payments for you—while keeping up to date with federal income tax and Alabama state tax laws, so you’re always compliant. Rippling’s PEO offers the capability to register and maintain your state tax accounts on your behalf, streamlining and automating more of the payroll tax procedure.

Payroll tax due dates in Alabama

Employers in Alabama must file a Quarterly Contribution and Wage Report with the Department of Labor using the eGov (Electronic Government Services) website. Reports are due the last day of the month following the end of the quarter:

First quarter (January-March) deadline: April 30
Second quarter (April-June) deadline: July 31
Third quarter (July-September) deadline: October 31
Fourth quarter (October-December) deadline: January 31

Missing the above deadlines can result in a fine of $25 or 10% of taxes owed, whichever is greater. 

How to submit payroll taxes in Alabama:

Now that you’re up to speed with the taxes you have to collect and when you have to pay them, the next step is to file them. Alabama employers remitting payments over $750 must use the Department of Revenue’s electronic system—My Alabama Taxes (MAT).

Enroll in My Alabama Taxes (MAT)

Enroll in My Alabama Taxes (MAT)

Alabama’s Department of Revenue’s My Alabama Taxes makes it easy for employers to manage their payroll taxes and more. You can: 

• Register a business or obtain a new tax account number.
• View or upload a report.
• Verify an exemption certificate.
• Sign a business tax return.
• Make payments. 

Visit the My Alabama Taxes website to enroll and use their services. 

File by mail

Most documentation and remittances have to be filed online through MAT. However, there are a few cases where you can still file some documents and small payments by mail. You’ll find a complete list, along with specific postal addresses, on the Alabama Department of Revenue’s website.

Other payment options

Electronic Funds Transfer (EFT)/Automated Clearing House (ACH): ALDOR accepts EFT/ACH payments for all types of tax. ACH Credit must be pre-approved by ALDOR. 

Credit Cards are accepted via MAT.

Rippling’s full-service payroll software

Rippling’s payroll software offers a simple solution to running payroll in Alabama. Powerful and reliable, it automatically calculates and files your payroll taxes with the right federal, state, and local agencies. You won’t have to worry about compliance or paying your taxes on time.

FAQs about Alabama payroll taxes

Are there local tax laws in Alabama?

Yes. Alabama is one of the US states that permits municipalities to collect an income tax. These are known as “occupational taxes” and apply to employers with employees who live and/or work in a taxed location. The rate varies depending on the municipality. People who work in Birmingham but are non-residents pay an occupational tax of 1% of their gross pay. Bessemer’s local income tax rate is also 1% of taxable income. The employer usually withholds the tax.

Can your tax returns be audited in Alabama?

Yes. Audits are a way to ensure businesses in Alabama meet their tax obligations. Audits are also required to assess workers’ compensation costs. 

Are nonprofit organizations subject to payroll taxes in Alabama?

In Alabama, non-profit organizations are responsible for payroll taxes. According to the Alabama Department of Labor, non-profit organizations are liable for state unemployment tax. They can be exempt from federal and Alabama income tax under section 501(a) of the Internal Revenue Code and if they’re classified as a Section 501(c)(3) exemption organization.

Non-profit organizations classified under Section 501(c)(3) become liable for Alabama unemployment taxes only after they’ve had four or more employees in each of 20 different weeks within the current or preceding calendar year.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.