If your small business has employees working in Alabama, you’ll need to pay Alabama unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In Alabama, state UI tax is just one of several taxes that employers must pay. Other important employer taxes, not covered here, include federal UI tax, and state and federal withholding taxes.
Different states have different rules and rates for UI taxes. Here are the basic rules for Alabama’s UI tax.
As an Alabama employer subject to UI tax, your small business must establish an Alabama UI tax account with theAlabama Department of Labor (ADOL). You can register for an account with ADOL either online or on paper. Once registered, you’ll be issued an unemployment compensation (UC) account number.
To register online, use ADOL’s eGov User Registration website. To register on paper, use Form SR-2, Application to Determine Liability. Blank forms are available for download from the Unemployment Compensation Documentssection of the ADOL website. There is no fee to register your business with ADOL.
Note: To establish your Alabama UI tax account, you’ll need a federal employer identification number (EIN). You can apply for an EIN at irs.gov. Generally, if you apply online, you will receive your EIN immediately.
In Alabama, most for-profit employers are liable for state UI taxes as soon as they have either:
These are effectively the same rules that apply for liability under the Federal Unemployment Tax Act (FUTA). In addition, if your business acquires another business that was liable for Alabama UI taxes—which is known as “successorship”—your business, too, will be liable for state UI taxes. Different rules, not covered here, apply to agricultural (farm) workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.
One piece of good news is that state UI tax payments generally can be credited against your FUTA taxes.
UI tax is paid on each employee’s wages up to a maximum annual amount. For many years, that amount, known as the taxable wage base, has been stable at $8,000 in Alabama. However, it’s always possible the amount could change.
The state UI tax rate for new employers also is subject to change from one year to the next. In recent years, however, it has been stable at 2.7%. Established employers are subject to a lower or higher rate than new employers depending on an “experience rating.” This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.
In Alabama, UI tax reports and payments are due the last day of the month following the end of the quarter. In other words, reports and payments are due by the following dates:
All reports and payments must be filed electronically (online). Use ADOL’s eGov Login website. You will be filing the information formerly included on paper Forms UC-CR-4 and UC-10-R. You’ll make payments through the online system by Electronic Funds Transfer (EFT).
You must file quarterly returns even if your business paid no wages during a quarter. You will be subject to a penalty if you fail to file.
You are required to post a notice (poster) regarding state unemployment claims in a conspicuous place. The poster provides basic information on when an employee may be entitled to unemployment benefits and how to file an unemployment claim. You can download a notice that meets all legal requirements (Your Job Insurance) from theUnemployment Compensation Documents section of the ADOL website.
Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it’s important that you do not misclassify an employee as an independent contractor. If you do misclassify an employee, you could be subject to penalties or fines.
You may decide that it’s easiest to hand over responsibility for payroll, including UI 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 UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and ADOL websites for the latest information. ADOL also publishes an EmployerHandbook that you can download from the ADOL website. In addition to state UI tax, employers have other responsibilities not covered in this article such as federal UI tax, state and federal withholding taxes, required reporting of new hires, and retention of employee records. You can get more information about other small business tax issues in other articles here on Nolo.com.