Article
5 min read
Comprehensive Guide to Payroll Taxes in Alabama
US payroll
Author
Shannon Ongaro
Last Update
July 14, 2025
Key takeaways
- Employers must pay unemployment insurance in the state of Alabama.
- Personal income tax must be deducted from the employee’s wages and withheld by the employer.
- Alabama employers do not need workers’ compensation coverage until they have five or more employees in the state.
Employers in Alabama must navigate a range of state-specific rules to stay compliant with Alabama payroll taxes. From unemployment insurance and personal income tax to workers’ compensation requirements, this guide breaks down everything you need to know about payroll tax obligations in the state.
Key Facts About Payroll Taxes in Alabama
- Federal Insurance Contributions Act (FICA): includes Medicare and Social Security taxes.
- Progressive Tax System: Alabama's tax rates rise with income.
- Employer Contributions: Increase with more staff.
- Alabama Department of Revenue (ALDOR): Oversees state payroll taxes.
State Unemployment Insurance (SUI) Tax
This employer-paid tax supports temporary unemployment benefits for workers.
State unemployment insurance is a national program administered by the US Department of Labor. The program provides temporary payments to people who are unemployed through no fault of their own. You can manage your Alabama unemployment insurance through an online portal. For more information on paying your unemployment insurance, refer to the Alabama Department of Labor.
Rates are based on the employer’s unemployment claims history and taxes paid, with notifications provided in December. Here are the key details:
| Detail | Description |
|---|---|
| New Employer Rate | 2.7% for at least the first year |
| Established Business Rate | Ranges from 0.2% to 6.8% |
| Taxable Wage Limit | $8,000 per employee per year |
| Maximum Tax | $544 per employee per year |
State Withholding Tax
Employers are also responsible for withholding personal income tax from their employee’s payroll. Personal income tax, also known as individual income tax or state income tax, is a tax on the income of Alabama residents. The tax is deducted from the employee’s wages and is withheld by the employer.
After you withhold the tax from your employee, you are responsible for paying the amount you withheld to the state. You can file and pay the withholding amount online. For more information on paying the withholding amount, refer to the Alabama Department of Revenue.
Employers withhold this tax from their employees' wages and remit it to ALDOR. The withholding amounts are determined by several factors including wages, filing status, and number of dependents. The rates range from 2% to 5%.
Payroll Tax Due Dates
Failing to meet these deadlines can result in a fine of 10% of the taxes owed.
| Quarter | Due Date |
|---|---|
| First | April 30 |
| Second | July 31 |
| Third | October 31 |
| Fourth | January 31 |
Submission Process
For payments exceeding $750, employers must use the My Alabama Taxes (MAT) system. Here's a breakdown of the submission methods:
| Payment Method | Details |
|---|---|
| Electronic | Required for payments over $750 |
| Optional for smaller payments |
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Withholding personal income tax from your Alabama employee
Employers are also responsible for withholding personal income tax from their employees’ payroll. Personal income tax, also known as individual income tax or state income tax, is a tax on the income of Alabama residents. The tax is deducted from the employee’s wages and is withheld by the employer.
After you withhold the tax from your employee, you are responsible for paying the amount you withheld to the state. You can file and pay the withholding amount online. For more information on paying the withholding amount, refer to the Alabama Department of Revenue.
Related resources: A Guide to PEO Services in Alabama
Paying Alabama workers’ compensation
In addition to paying Alabama payroll taxes, employers also need to pay for workers’ compensation. Unlike most other states, Alabama does not require employers to have workers’ compensation coverage until they have five or more employees in the state.
Workers’ compensation is a type of insurance that covers wages and medical benefits for employees who are injured while performing their job.
The state of Alabama provides information online to help you find a qualified commercial carrier. Employers should verify that their workers’ compensation insurance is compliant with the state’s regulations for workers’ compensation.
Related resources: Workers' Compensation
Continuous Compliance™
Simplify US payroll tax compliance with Deel
While this guide provides essential information on Alabama payroll taxes, payroll compliance, and state requirements extend beyond what is covered above. To streamline the process and ensure full compliance, companies can turn to Deel.
Managing payroll taxes in Alabama requires careful attention to detail and adherence to state laws:
- Local Taxes: Some municipalities collect an additional income tax known as occupational taxes, which vary by location.
- Audits: Businesses may be audited to ensure compliance with tax obligations.
- Nonprofits: Nonprofit organizations are subject to state unemployment tax if they meet certain employee thresholds.
By understanding these obligations and utilizing available resources like the MAT system, employers can ensure compliance and smooth operation of their payroll processes.
Deel offers a comprehensive solution for managing US and international payroll, including payments, taxes, worker classification, and more. Speak with an expert today to see how you can streamline your US payroll processes and ensure compliance with state regulations.
Disclaimer: This article is provided for general informational purposes and should not be treated as legal or tax advice. Consult a professional before proceeding.
FAQs
Is Alabama a high tax state?
Alabama is generally considered a low to moderate tax state. According to the Tax Foundation, Alabama ranks near the bottom for overall tax burden, with relatively low property and income tax rates compared to other states.
Do I have to pay Alabama state taxes if I work in another state?
If you're an Alabama resident, you're required to pay Alabama income tax on all income, regardless of where it's earned. However, if you pay income taxes to another state, you may be eligible for a credit to avoid double taxation. This credit is claimed on Alabama Form 40, Schedule CR.
Is Alabama a reciprocal state?
Alabama does not have tax reciprocity agreements with other states. This means nonresidents working in Alabama must file an Alabama state income tax return for earnings sourced in the state.
Does Alabama tax all income?
No, Alabama does not tax all forms of income. Social Security benefits, certain retirement income, and military retirement pay are exempt. However, wages, salaries, and most other income types are taxable.
Do you pay taxes on labor in Alabama?
Yes, wages and salaries are taxable as personal income. Employers are required to withhold these taxes and remit them to the Alabama Department of Revenue.
About the author
Shannon Ongaro is a content marketing manager and trained journalist with over a decade of experience producing content that supports franchisees, small businesses, and global enterprises. Over the years, she’s covered topics such as payroll, HR tech, workplace culture, and more. At Deel, Shannon specializes in thought leadership and global payroll content.
