Payroll Taxes - What Wages Are Subject to Alabama Withholding?
Payroll Taxes - What Wages Are Subject to Alabama Withholding
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State withholding tax is the money an employer is required to withhold from each employee's wages to pay the state income tax of the employee. The employer pays no part of the tax, but is responsible for collecting and remitting the tax withheld.
In general all wages earned in Alabama are subject to income tax withholding. However, there are certain types of employment that are exempt from payroll withholding such as merchant seaman, agricultural and domestic employees, and duly ordained ministers. Both wages earned by a resident or a non-resident while working in Alabama are subject to Alabama withholding tax.
Wages (for Alabama withholding tax purposes) shall include those wages exempt from federal withholding if the wages represent taxable income under the Alabama income tax law and there is no provision under the Alabama law for a deduction corresponding to the allowable federal deduction.
The following federal code sections are recognized by the State of Alabama and should not be included in an employee's wages and are not subject to withholding tax.
1. Cafeteria Plans: A cafeteria plan is a separate written plan maintained by an employer for employees that meet the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pre-tax basis.
2. Retirement Savings (code 219) Plans.
3. 401K Plans: Cash or Deferred Arrangement. A 401(k) plan allows a worker to save for retirement and have the savings invested while deferring income taxes on the saved money and earnings until withdrawal.
4. 403(b) Plans: Qualified Annuity Plan (Teacher's Retirement). A 403(b) plan is a retirement plan offered by public schools and certain tax-exempt organizations. Basically, 403(b) plans are similar to 401(k) plans. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by the employer. This deferred money generally does not get taxed by the federal government or by most state governments until distributed.
5. 408(k) Plans: Simplified Employee Pension: A simpler alternative to a 401(k) plan available only to companies with 25 or fewer employees.
6. 408(p) Simple Plans: Savings Incentive Match Plan (IRA).
7. 457 Plans: Deferred Compensation Plans of State and Local Governments and Tax Exempt Organizations
A business or a tax preparer/practitioner can use a payroll software to calculate Alabama payroll taxes and employer withholding amounts. The tax software can be setup to automatically exclude certain types of incomes (or payroll items) when calculating the state of Alabama withholding tax.
For more information about Alabama payroll taxes, please visit the Alabama Department of Revenue website - Alabama Withholding Tax Forms section: http://www.revenue.alabama.gov/Withholding/index.html
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