Employers in Alabama are required to withhold federal, state, and in some cases, local income taxes from their employees, and employers in other states who have employees living in Alabama may also need to comply with Alabama’s payroll laws.
After setting up your business and reporting new hires, the steps to calculate, pay, and file payroll taxes in Alabama are relatively straightforward. Here’s what you need to know to get it right.
1. Set Up Your Alabama Business
Before you have a payroll in Alabama, your business needs to be registered as a legitimate business.
You can register your business through the Alabama Secretary of State website, which includes the business forms you need plus helpful services, like a business name search and a trademark application.
Next, register your business with the Alabama Department of Revenue, through which you’ll file and pay Alabama payroll taxes.
Finally, as a new business, think about how you’ll want to pay employees. What pay period do you want to use? Will you pay with checks or direct deposit? What benefits are you going to offer that will lead to employee deductions?
All of your payroll specifics should be set before moving any further, as the answers to these questions affect your overall Alabama payroll.
2. Collect and Report New Hire Information
Alabama businesses must collect the following information from employees to register their employees with the state and accurately collect and report payroll taxes:
- Name
- Address
- Social Security number
- First date of work
- Whether the employee was newly hired or had previously worked with the company and was rehired
- State Form A4: Form A4 is Alabama’s Employee’s Withholding Exemption Certificate. It includes information similar to the federal W-4 but with specific withholding information relevant to the state of Alabama. Alabama only recognizes Form A4 when determining how much to withhold from employee paychecks.
After collecting and reviewing all required information and payroll forms from your new hires, you’ll register each new hire with the Alabama Department of Labor, a process employers can complete electronically after registering for the Alabama New-Hire system.
You must register each employee within seven days of their hire date. Or, if you’re reporting new hires via the electronic system, you can do so twice a month, as long as each reporting date is 12-16 days apart.
3. Calculate Alabama Gross Pay and Taxes
In most cases, you’ll need an employee’s gross pay to determine the amount of payroll taxes you need to withhold.
Gross pay is the total of the employee’s hourly wage times the number of hours they worked, including any overtime, shift differential pay, commissions, or bonuses.
So, an employee working 40 hours a week making $25 per hour makes $1,000 in gross pay for one week.
To determine the gross pay of a salaried worker, divide their annual salary by the number of pay periods in one year. Someone earning $52,000 in a business using biweekly pay periods would make $2,000 in gross pay per paycheck ($80,000/26 pay periods).
Use an employee’s gross pay to calculate their federal, state, and local payroll taxes. Employers are responsible for withholding the correct amount for each tax from an employee’s paycheck and then submitting that amount to the appropriate agency.
Alabama employers must withhold income tax from Alabama employees. The current rate is as follows:
- 2% on up to $500 in wages
- 4% on the next $2,500 in wages
- 5% on any wages over $3,000
Alabama also requires businesses to pay SUTA tax, which is short for State Unemployment Tax Act. This is basically the state version of the federal unemployment tax, which helps fund Alabama’s unemployment program.
New employers pay 2.7% on the first $8,000 of an employee’s pay for the year. This rate usually remains the same for at least one year, after which the employer’s rate may change.
Alabama determines the SUTA rate for each employer based on how much they’ve paid in taxes and their claims history, with rates varying between 0.2% to 6.8%.
If your employees live in Bessemer, Birmingham, or Macon County, you’ll also need to withhold an income tax of 1%, while residents in Gadsden pay 2%.
4. Pay and File Alabama Payroll Taxes
Alabama employers must register with My Alabama Taxes to receive a tax account number with the state. This number is similar to the Federal Employer Identification Number (FEIN) that you’ll need to pay federal taxes. Your Alabama tax account number is also necessary for paying other types of business state taxes, like sales tax and sellers’ use tax.
Businesses can pay these taxes monthly, quarterly, or annually, depending on how often they’re required to file their taxes. Due dates are as follows:
- Monthly returns: Due by the 15th after the month’s closing.
- Quarterly returns: Due by the last day of the month after the quarter’s closing.
- Annual returns: Due by January 31st following the withholding year.
Find the appropriate form for your tax filing situation on the Alabama Department of Revenue website.
You’ll also need to register with each locality’s tax department to file and pay taxes for Bessemer, Birmingham, Gadsden, and Macon County employees.
How to Run Alabama Payroll Easily
Have you tried to run payroll manually and got caught up on using the right forms and calculating all payroll taxes correctly for each employee?
If so, you aren’t alone.
Payroll is tricky, and it differs slightly from state to state. When running payroll in Alabama, you need to use Alabama’s tax forms and tax rates to get everything right.
That’s why I advocate for using payroll software instead of running payroll manually. Reliable payroll software does a lot of the work for you, like calculating different tax rates and providing you with the registrations you need to get your employees set up properly.
After making all of your employees’ calculations, payroll software even sends them their paychecks automatically while setting aside the deductions you need to pay. Some can even help you file your Alabama payroll taxes to keep you on track.
In short, there’s no reason not to integrate payroll software into your system. It’ll help you save time, remain compliant, and pay your employees accurately.
