If your small business has employees working in Alabama, you’ll need to withhold and pay Alabama income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Alabama state income tax withholding for employees.
With rare exceptions, if your small business has employees working in the United States, you’ll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you’ll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Alabama) issue separate state tax ID numbers. You’ll need an EIN to register with the state (see below). You can apply for an EIN at irs.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish an Alabama withholding tax account with the Alabama Department of Revenue (DOR). You set up your account by registering your business with the DOR either online or on paper. To register online, use the My Alabama Taxes (MAT) system. It can take 3-5 business days for the DOR to assign an account number if you register online. To register on paper, use Form COM:101, Combined Registration/Application. Blank forms are available for download from the withholding tax section of the DOR website. You can submit Form COM:101 by regular mail or by fax. If you register on paper, it can take up to two weeks for the DOR to assign an account number. There is no fee to register your business with the DOR.
All new employees for your business must complete a federal Form W-4 and the related Alabama Form A-4,Employee's Withholding Tax Exemption Certificate. Because the value of state and federal exemptions differ, the federal Form W-4 cannot be substituted for the state Form A-4. If an employee fails to furnish an employer with a signed Form A-4 exemption certificate, the employer is required to withhold using zero exemptions. You can download blank Form A-4s by clicking on “Forms” in the withholding tax section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
Unlike most other states, Alabama does not require employers to pay withholding taxes on a regular schedule, such as monthly or quarterly, for an entire calendar year. Instead, employers are required to make payments monthly for those months in which more than $1,000 is withheld, and otherwise to pay quarterly. Two months should not be added together to reach the $1,000 threshold; each month should stand alone. Monthly payments, along with monthly withholding tax returns, are due by the 15th day of the month following the month in which withholding exceeded $1,000. Quarterly payments, along with a quarterly withholding tax return, are due by the last day of the month following the end of the quarter.
To help illustrate how making payments works, the DOR provides the following basic example. An employer withholds $1,050 in January and $800 in February. The employer would be required to file a monthly return and remit the tax withheld for January by February 15. Because less than $1,000 was withheld during February, this tax would not be due until the due date for the quarterly return, April 30.
In addition, any single withholding tax payment of $750 or more must be filed electronically. You can make electronic payments through the MAT website.
For monthly payments, use Form A-6, Alabama Department of Revenue Employer’s Monthly Return of Income Tax Withheld. For quarterly payments, use Form A-1, Alabama Department of Revenue Employer’s Quarterly Return of Income Tax Withheld. Do not use Form A-6 to make quarterly payments. Both forms are available for download from the DOR website, but should only be used on a temporary basis. For ongoing purposes, request preprinted forms from the DOR website. Remember: Payments of $750 or more must be filed electronically.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time, so you should check with the DOR at least once a year for the latest information.
If a payment and return is due on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
The DOR provides several different methods for calculating how much tax to withhold. For more information, check the DOR publication Withholding Tax Tables and Instructions for Employers and Withholding Agents. The publication is updated at least once a year. You can download a copy from the withholding tax section of the DOR website.
After the end of the year, you must file an annual reconciliation with the DOR that summarizes the employee taxes you’ve withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 summarizing the employee’s withholding for the year. You need to include copies of W-2s sent to all of your employees working in Alabama with your annual reconciliation. Larger employers are required to file the annual reconciliation and copies of W-2s online. Smaller employers can file online or on paper. Use Form A-3,Annual Reconciliation of Alabama Income Tax Withheld. An A-3 received without copies of W-2s will be returned to the sender.
The annual reconciliation is due on or before the last day of February. As with monthly and quarterly tax payments and reports, if this date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it’s easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Alabama employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.