Operational Gaze:
How to Run Payroll in Alabama?

April 11th 2024

Handling payroll in Alabama involves the entire process of compensating employees for their work. This encompasses calculating employees’ earnings, managing deductions, submitting necessary reports, navigating payroll tax procedures, and ultimately distributing payments.

Given the unique factors related to minimum wage, tax regulations, and labor laws in Alabama, effectively managing payroll in this state requires a deep understanding of the local regulatory framework.

That’s why we’ve put together a series of straightforward, step-by-step guidelines to assist you in managing each pay cycle, specifically tailored to Alabama. This article is aimed at providing you with essential insights into the complexities of payroll operations in the state, ensuring that you have a clear understanding of your situation and can pinpoint areas where you might need additional assistance.

This Article Covers

Laws That Affect Payroll Procedures in Alabama
Worker Classifications in Alabama
Payroll Forms and Relevant Bodies in Alabama
Applicable Taxes in Alabama
Key Pay Elements That Impact Payroll in Alabama
Step-by-Step Guide to Payroll in Alabama

Laws That Affect Payroll Procedures in Alabama

In the space of payroll procedures, certain legal regulations govern how employees are compensated and businesses must adhere to these rules. 

Alabama Laws

There are a number of state legislations that will impact your payroll processing, including:

  • Alabama Labor Code: The Industrial Relations and Labor section in the Code of Alabama addresses wage payments, sick leave, and workers’ compensation.
  • Overtime: Overtime pay in Alabama is determined by daily and weekly hours worked, as well as the total days worked. 
  • Paid Breaks or Lunch Period: Alabama labor laws, as well as federal wage and hour laws do not impose a requirement on employers to provide breaks or meal periods. Nonetheless, it is common for employers to offer short rest breaks, often lasting 20 minutes or less. According to the Department of Labor (DOL), it is mandated that these brief breaks be compensated.
  • Unemployment, Disability, and Workers’ Compensation: Alabama employers are required to participate in the state’s unemployment fund, and both disability and unemployment insurance are legally mandated by the state.
  • Minimum Wage: Employers in Alabama must pay employees the federal minimum wage rate, as set by the Fair Labor Standards Act (FLSA). The federal minimum wage rate is $7.25 per hour.
  • Paid Time Off and Leaves: Federal labor laws dictate rules in Alabama regarding leave pay. Employers are not obligated to provide compensation for any form of leave, including sick leave, holiday leave, jury duty leave, voting leave, or bereavement leave.
  • Payment Records: Employers in Alabama must provide pay stubs either twice a month or at the time of each wage payment. These pay stubs must include the employer’s name, address, all deductions, and other mandated information.
  • Final Paycheck: When an employee is terminated, they are entitled to receive all their wages, including accrued vacation pay, promptly.

Federal Laws

There are three significant pieces of federal legislation that will have an impact on your payroll processing procedures:

  • The Fair Labor Standards Act (FLSA): The FLSA establishes standards and criteria for minimum wage, overtime compensation, recordkeeping, classification of exemptions, and regulations related to child labor across a wide range of sectors. This encompasses not only private businesses but also federal, state, and local government entities.
  • The Federal Insurance Contributions Act (FICA): Under FICA, both employers and employees have a responsibility to contribute to Social Security and Medicare. Employers have the responsibility of  deducting 6.2% for Social Security tax and 1.45% for Medicare tax from each employee’s earnings. Additionally, employers are required to match these deductions, resulting in a combined FICA payroll tax processing rate of 15.3% for each employee.
  • The Federal Unemployment Tax Act (FUTA): FUTA mandates that employers must make contributions to unemployment taxes, which are used to provide benefits to eligible employees who face job loss. While it is not precisely a payroll deduction, as it exclusively concerns employers, FUTA contributions must still be recorded in every payroll cycle. There may be exceptions based on the industry, but in general, a 6% tax on the first $7,000 paid to an employee annually is anticipated.

HR Laws

  • New Hire Reporting: An employer is required to notify the department within a seven-day period following the hiring, recall, or rehiring of any new employee. This notification must include details like the full name, address, social security number, and date of employment of each newly hired, recalled, or rehired individual, as well as the name, address, state and federal identification numbers of the employer.
  • Posting Requirements: The Alabama Department of Labor mandates that all businesses operating in Alabama and employing workers must display a series of labor law posters within the workplace. These posters encompass vital subjects including minimum wage regulations, health and safety guidelines, and other essential labor laws.

Worker Classifications in Alabama

Employees and Independent Contractors

Comprehending and abiding by the correct employee classification is crucial for both employers and workers in Alabama. This classification not only has a substantial impact on payroll administration but also extends to the entitlements, perks, and legal safeguards afforded to employees.

In the event that an individual is classified as an employee, their earnings become subject to state unemployment levies, potentially qualifying them for unemployment benefits. Conversely, if they’re labeled as an independent contractor, the employer is exempted from the responsibility of remitting state unemployment taxes on their income, and their work falls outside the scope of covered employment.

Moreover, independent contractors are not granted the same legal privileges as employees, encompassing considerations like:

  • Compliance with minimum wage stipulations.
  • Eligibility for overtime compensation.
  • Accessibility to worker’s compensation benefits.

To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Alabama, and your rights as an hourly employee in Alabama.

Common-Law Rules in Alabama

In Alabama, understanding the common law rules is essential for business owners to accurately categorize individuals who provide services as either employees or independent contractors. When individuals are considered employees, businesses must withhold and deposit income taxes, social security taxes, and Medicare taxes from their wages, along with paying employer portions of social security and Medicare taxes. 

Businesses are also required to pay unemployment tax on wages paid to employees. However, these tax obligations do not generally apply to payments made to independent contractors. To determine whether an individual providing services is an employee or an independent contractor, businesses should take into account several factors, including:

  • Behavioral Control: Does the business exert control over what the worker does and how they perform their tasks?
  • Financial Control: Are business-related aspects of the worker’s role, such as payment, expense reimbursement, and the provision of tools or supplies, controlled by the entity engaging the services?
  • Nature of the Relationship: Is there a formal contract in place or the provision of employee-like benefits, such as pension plans, insurance, or vacation pay? Is the work integral to the business, and does it entail an expectation of an ongoing relationship?

It is crucial for businesses to carefully weigh these factors when determining the employment status of a worker. While some factors may point toward the worker being an employee, others may indicate that the worker should be classified as an independent contractor. The common-law rules in Alabama align with the Internal Revenue Service (IRS) criteria for determining independent contractor status.

Payroll Forms and Relevant Bodies in Alabama

Effectively handling payroll in Alabama means following several state and federal rules, which often include filling out necessary payroll forms. In this section, we’ll look at the important forms and the relevant authorities in Alabama that employers should know to stay compliant and manage payroll responsibilities well.

Alabama Payroll Forms

  • Alabama A-4 Form: This assists employers in figuring out how much tax to withhold from employees’ paychecks.
  • Form A-1, Alabama Quarterly Tax Report: Alabama employers use to report and pay state income taxes taken from their employees’ paychecks every quarter.
  • Form A-3: This form is used by Alabama employers to check that they’ve collected and sent the correct amount of state income tax on behalf of their employees throughout the year.
  • Alabama New Hire Reporting Form: Used by both public and private to report any new or returning employees they hire to work in Alabama.

Federal Payroll Forms

  • W-4 Form: Helps employers determine the correct tax withholding for their employees.
  • W-2 Form: Displays the total yearly earnings of each employee.
  • W-3 Form: Summarizes the combined pay and taxes for all employees.
  • Form 940: Reports unemployment taxes to the IRS.
  • Form 941: Reports income and FICA taxes withheld from paychecks on a quarterly basis.
  • Form 944: Reports annual income and FICA taxes withheld from paychecks..
  • 1099 Forms: Provide contractors with the necessary information to calculate the taxes they owe the IRS based on their earnings.
  • Form I-9: Utilized to verify the identity and work eligibility of individuals employed in the United States.

Federal and Alabama Payroll/ Tax Bodies

  • Internal Revenue Service (IRS): The IRS serves as the primary federal tax agency in the United States, responsible for collecting federal income taxes, including payroll taxes. Employers deduct federal income tax and FICA (Social Security and Medicare) taxes from employees’ earnings and then send these taxes to the IRS.
  • Social Security Administration (SSA): The SSA manages the Social Security program, which covers Social Security benefits and Medicare. Employers and employees contribute to the Social Security and Medicare trust funds through payroll taxes. The SSA handles the collection and distribution of these funds to eligible individuals.
  • Alabama Department of Revenue: At the state level: This agency oversees state-level tax matters within Alabama, such as state income tax and sales tax. Employers in Alabama are required to comply with state tax regulations and report state income taxes withheld from their employees’ salaries.
  • Alabama Department of Labor: This department is responsible for labor-related affairs in Alabama, including unemployment compensation, wage and hour laws, and workplace safety. Employers in Alabama may need to adhere to state labor laws and report information concerning unemployment taxes to this department.
  • Wage and Hour Division (WHD): The WHD, part of the U.S. Department of Labor, enforces federal labor laws, encompassing minimum wage, overtime pay, and child labor regulations. Employers in Alabama are subject to federal wage and hour laws enforced by the WHD. These laws establish specific minimum labor standards that must be observed.

Applicable Taxes in Alabama

Employer Contributions

Federal Unemployment Tax Act (FUTA): The State of Alabama is in compliance with the Federal Unemployment Tax Act (FUTA) which currently sets a standard federal rate, currently 6.0% on the first $7,000 of each employee’s wages.

Withheld from Employee’s Wages

  • Alabama Income Taxes: In Alabama, there is a flat 5% income tax rate applied to the total earnings of each employee. Additionally, some Alabama municipalities may impose local income taxes on both residents and non-residents, with the tax rates varying by city.
  • Workers’ Compensation in Alabama: Employers in Alabama are required to provide workers’ compensation insurance if they have at least one employee working more than 35 hours a week for a minimum of 13 weeks within a year. They must also maintain a workforce of at least three employees at any given time, including part-time staff. The cost of workers’ compensation coverage typically amounts to around 70 cents for every $100 of payroll processed.
  • Social Security (FICA) Withholding: Social Security withholding, often referred to as the FICA tax, involves deducting 6.2% from an employee’s earnings, but only on their income up to the first $137,700. The maximum withholding is set at $8,537.40. Additionally, there is a separate deduction for Medicare, specifically the Hospital Insurance portion, which is 1.45% applied to all employee earnings.

Additional Relevant Subtractions to Withhold on Behalf of Employees

The federal Fair Labor Standards Act (FLSA) permits employers to withhold money from employees’ paychecks only in cases specifically allowed by law or when employees have given their consent. In addition to the taxes mentioned earlier, here are some examples of deductions that are legally permitted:

  • Personal Absence: Employers can make deductions when employees are absent for personal reasons for one or more full days, with the exception of cases involving sickness or disability.
  • Sickness or Disability: If employees are absent due to sickness or disability for one or more full days, deductions are allowed, but only if there is a legitimate plan or policy in place to compensate for loss of pay related to illness.
  • Jury and Witness Fees: Deductions can be made to account for jury fees, witness fees, or temporary military duty pay received by employees.
  • Safety Violations: Employers are permitted to impose penalties in good faith for serious violations of safety rules, and these penalties may be deducted from employees’ pay.
  • Disciplinary Suspensions: Deductions are allowed for unpaid suspensions lasting one or more full days, serving as a disciplinary measure for violations of workplace rules, as long as they are imposed in good faith.
  • Family and Medical Leave: Employers can make deductions for unpaid leave taken under the Federal Family and Medical Leave Act, which provides job-protected leave for specific family and medical reasons.

Key Pay Elements That Impact Payroll in Alabama

Minimum Wage

The current minimum wage in Alabama is set at $7.25 per hour for non-tipped employees, while employees who receive tips have a minimum wage of $2.13 per hour. These minimum wage rates are in accordance with federal regulations governing exemptions from mandatory minimum wage requirements.

Overtime

When it comes to Alabama overtime laws, Alabama follows the overtime laws established by the federal Fair Labor Standards Act (FLSA).

The general rule is that if an employee works more than 40 hours in a workweek, they are entitled to receive overtime pay at a rate of 1.5 times their regular hourly wage. In the context of Alabama’s minimum wage, which was $7.25 per hour in 2023, this would result in an overtime rate of $10.88 per hour.

Workers’ Compensation Insurance

Alabama’s workers’ compensation programs serve as a safety net for employees who sustain job-related injuries or illnesses. Additionally, these programs extend disability benefits to workers incapacitated due to work-related factors, mitigating the financial impact when employees require time off from work.

Coverage:

  • Workers’ compensation covers the medical expenses incurred due to workplace injuries and illnesses.
  • Employers are protected under Alabama’s workers’ compensation law, thanks to the exclusive remedy provisions.
  • Covered scenarios include medical costs associated with injuries at work, illnesses caused by workplace factors.

Coverage Requirements:

Alabama law mandates that employers with at least five employees, which includes part-time workers and corporate officers, must provide workers’ compensation.

Certain categories are exempt, such as domestic workers, farm laborers, casual employees, and small municipalities.

Comprehensive Coverage:

Workers’ compensation in Alabama offers financial protection for a range of expenses, including accidents, injuries, illnesses, wage loss, ongoing medical care, funeral costs, and compensation for temporary or permanent disabilities stemming from work-related factors.

Pay Stub Laws

In Alabama, the state follows federal law regarding wage payment methods and pay frequency. This means that employers in Alabama are generally required to adhere to the wage payment and frequency regulations established by the federal Fair Labor Standards Act (FLSA).

Under the FLSA, employers are mandated to maintain accurate records of the hours worked by employees and the wages paid to them. However, it’s important to note that the FLSA does not specifically require employers to provide employees with pay stubs, which are sometimes referred to as wage statements or paychecks.

Employers may choose to issue pay stubs or wage statements as a matter of company policy or to comply with state-specific requirements.

Wage Garnishment

Wage garnishment laws in Alabama, like in many other states, are governed by both federal and state regulations:

  • Federal law, under the Consumer Credit Protection Act (CCPA), limits the maximum amount that can be garnished from an individual’s earnings, generally capping it at 25% of disposable income.
  • Various debts can be subject to garnishment, including child support, alimony, student loans, and unpaid taxes. For other debts like credit card or medical debt, a court judgment is typically required before garnishment.
  • Alabama law aligns with federal wage garnishment regulations and provides protection to employees from termination due to a single wage garnishment. However, protection doesn’t extend to multiple garnishments.
  • Prior to garnishment, creditors must provide notice to the debtor, who has the right to dispute the debt or request a hearing.
  • State law addresses the prioritization of different types of debts and the garnishment process.

Final Paycheck

In Alabama, there are no set rules regarding when a final paycheck should be provided. Therefore, according to the Fair Labor and Standards Act (FLSA), employers must give the final payment on the next scheduled payday, whether an employee quits or is let go. This last paycheck should encompass the employee’s regular earnings from the most recent pay period, in addition to any other forms of compensation like commissions, bonuses, and accrued sick and vacation pay that are eligible for payout.

Step-by-Step Guide to Payroll in Alabama

  1. Understanding Payroll Rules: Before you dive into payroll in Alabama, it’s crucial to grasp the specific rules that pertain to your business. These rules can differ based on factors like your industry, the number of employees, and worker types. Familiarize yourself with Alabama labor laws and federal payroll regulations affecting your operations.
  2. Register Your Business as an Employer with the IRS: This involves obtaining your Employer Identification Number (EIN) and setting up an account within the Electronic Federal Tax Payment System (EFTPS). For new businesses, it is important to secure an EIN before embarking on the creation of a customized, systematic payroll process flowchart. The EIN, comprising nine digits, serves as a unique identifier utilized by the Internal Revenue Service (IRS) to monitor a company’s tax-related operations. You can easily apply for an EIN online using Form SS-4.
  3. Registering with the State of Alabama: If your business operates in Alabama, you must register it with the state. New businesses can complete the registration process on the Alabama Secretary of State’s website. Additionally, any business paying employees in Alabama must also register with the Alabama Department of Revenue.
  4. Determining Employee Classification: Correctly categorize your workers as employees or independent contractors. Accurate classification is key because it impacts tax and wage reporting. Misclassification can lead to legal issues and penalties. Consider using the Common Law Test for guidance.
  5. Collecting Employee Payroll Forms: When hiring in Alabama, make sure to gather specific forms during employee onboarding. Employees should complete the I-9 verification and the state’s version of the W-4, known as the Employee’s Withholding Tax Exemption Certificate (Form A4).
  6. Tracking Time and Attendance: Implement a thorough system for tracking employee time and attendance. This system should cover workweeks, overtime calculations, break times, and leave entitlements. Utilize digital tools like time and attendance software to enhance accuracy.
  7. Establishing a Payroll Cycle: Set up consistent pay periods and ensure that employee paychecks are provided within these periods, adhering to state regulations.
  8. Filing Federal Payroll Taxes: Adhere to IRS guidelines for federal taxes, including unemployment tax. Deposit employment taxes as per your assigned schedule, either monthly or semiweekly, as determined by the IRS.
  9. Maintaining and Archiving Payroll Records: Keep records for all employees, even former ones, for an extended period, following federal guidelines.
  10. Processing Annual Payroll Reports: Each year, complete payroll reports, including W-2 Forms and 1099 Forms. Provide these forms to employees no later than January 31 of the following year.

Final Thoughts

The various aspects of handling payroll, which involve calculating employee pay, managing deductions, handling taxes, and disbursing payments, highlight its critical role in the world of employment in Alabama. It’s essential to understand and comply with the specific regulations for minimum wage, tax, and labor laws in the state to effectively manage payroll. The good news is that there are tools available to make this process easier. We have compiled a list of the top 6 apps designed to streamline your payroll operations in the US. Alternatively, if you already have a system in operation, we offer 10 tips to enhance the efficiency of your US payroll processes.

Important Cautionary Note

This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.

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