CenterPoint Payroll^® - Exclude Overtime Wages from Gross Wages for Alabama Overtime Exemption

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For the tax year beginning on or after January 1, 2024, overtime pay received by a full-time hourly wage paid employee for hours worked above 40 in any given week are excluded from gross income and therefore exempt from Alabama Withholding Tax.

 

Follow the steps below to exclude overtime wages from gross wages for Alabama Withholding Tax:

Simple or Manual Overtime

Advanced Overtime

Setup Earnings

Pay Employees

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Simple or Manual Overtime

If you use the simple overtime calculations (one overtime rate for any hours over a threshold, for example time and a half for any hours worked over 40 per week) or manually enter overtime hours into an overtime earning code, the only necessary change is to make your overtime earning(s) exempt for the state withholding tax. For more information about the simple overtime method, see the Simple Overtime topic or the video.

1. Select Setup > Payroll Details > Earnings.
2. Edit your Overtime earning.
3. Select the Taxes tab.
4. For Alabama State Withholding (AL WH Tax) select the check box in the Exclude From Earning column.
5. Click Save.

6. Repeat steps 1-5 for any other overtime earning codes you may have.

Advanced Overtime

Advanced overtime (also referred to as calculated overtime) is a flexible process that handles a variety of overtime calculations, for example multiple overtime rates, average wage calculations, daily and weekly/bi-weekly overtime, or overtime periods that do not align with pay periods. For more information about the advanced overtime method, see the Advanced Overtime topic or the video.

The calculated overtime process pays only the differential, and not the full pay over 40 hours, in the overtime earning code, so it is not possible to only make the overtime earning exempt like with the simple overtime process. Some manual entry is required to adjust the regular pay to correct the taxable wages.

If you are using calculated overtime but do not require average wage calculations, daily overtime, or do not have overtime periods that do not align with your pay periods, consider using simple overtime instead. For more information, see the Simple Overtime topic or the video.

If you do require the more complicated calculated overtime calculations, additional earning codes can be created that allow you to adjust the calculated overtime and correct taxable wages. Manual entry is required, but CenterPoint will still calculate the hours and average wage.

Follow the steps below if you require the more complicated calculated overtime calculations to exclude overtime wages from gross wages for Alabama Withholding Tax:

Setup Earnings (One Time Setup)

CenterPoint will calculate the differential as calculated overtime which can be set as exempt from the Alabama Withholding Tax. Then a manual entry can be entered to remove the overtime portion of the regular earnings from the taxable wages, and replace them with nontaxable overtime wages. This requires three earnings:

• Calculated Overtime (Non-taxable)
• Overtime Adjustment (Taxable)
• Manual Overtime (Non-taxable)

1. Modify your Calculated Overtime Earning(s) so it is exempt from Alabama Withholding Tax (AL WH Tax):

   1. Select Setup > Payroll Details > Earnings.
   2. Select your Calculated Overtime Earning and click Edit.
   3. Select the Taxes tab.
   4. For Alabama State Withholding (AL WH Tax) select the check box in the Exclude From Earning column.
   5. Click Save.

2. Create an Overtime Adjustment earning:
   1. Select Setup > Payroll Details > Earnings.
   2. Click New.
   3. Enter an Abbreviation and Name.
   4. In the Method box, select Hourly.
   5. Verify that the Include in Calculated Overtime check box is NOT checked.
   6. Click Save.
   7. At the Add Earnings to Employees message, click Yes.
   8. Select the employees who earn overtime and move them to the right.
   9. Click Add, and then click Yes.

3. Create a Manual Overtime Earning
   1. Select Setup > Payroll Details > Earnings.
   2. Click New.
   3. Enter a Name and an Abbreviation.
   4. In the Type box, select Regular Pay.
   5. In the Method box, select Hourly.
   6. Select the Taxes tab.
   7. For Alabama State Withholding select the check box in the Exclude from Earnings column.
   8. Click Save.
   9. At the Add Earnings to Employees message, click Yes.
   10. Select the employees who earn overtime and move them to the right.
   11. Click Add, and then click Yes.

Pay Employees

When paying employees, employees who have overtime calculated will need to have manual entries to move the regular overtime hours to an earning that is not taxable for Alabama Withholding.

1. Select Processes > Pay Employees.
2. Create the pay run and enter time like usual.
3. For any employee who has over time calculated:

1. Note the Gross Earnings, Net Pay, and Total Hours for the employee.
2. Expand the Overtime Earnings section by clicking the + and note the Average Rate and total OT Hours for each OT Period.
3. In the Overtime Adjustment earning, enter the OT hours as a negative, with the Average Rate as the rate for each OT Period where overtime was calculated.
4. In the Manual Overtime earning, enter the OT hours as a positive, with the Average Rate as the rate, for each OT Period where overtime was calculated.
5. This should result in the same Gross Pay, Net Pay, and Total Hours as before the adjustment was entered (noted instep 3a). The adjustment is removing the regular pay as taxable and adding it back in as non-taxable overtime pay.

4. Repeat steps 1-3 for each employee with overtime.
5. Post the pay run and print checks/advices as usual.

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