For many employers, one of the most common payroll misconceptions is that employees can simply request that no Alabama state income tax be withheld from their paycheck. Under Alabama law, that is not the case. Alabama Department of Revenue has been adding more emphasis on this as of late.
The Alabama Taxpayer and Fraud Prevention Act (Act 2015-504) significantly changed the state's withholding requirements as part of an ongoing effort to reduce income tax fraud. As a result, employees cannot elect to stop Alabama income tax withholding unless they legitimately qualify under Alabama law. Understanding these requirements is important because errors can create unexpected tax liabilities and penalties for both employees and employers.
What Employers Need to Know
Every new employee must complete a valid Alabama Form A-4. Unlike the federal Form W-4, the Alabama A-4 determines the employee's state withholding exemptions and is required for Alabama payroll compliance.
If an employee does not provide a completed Alabama Form A-4, Alabama law is clear: the employer must withhold state income tax using zero exemptions, which results in withholding at the highest applicable rate.
An employer cannot simply honor an employee's request to "not withhold state taxes" if the employee does not qualify. Doing so places the employer at risk of noncompliance.
Exempt Status Has Strict Requirements
Many employees mistakenly believe they can claim "exempt" because they prefer a larger paycheck or because they typically receive a tax refund. Neither of those situations qualifies an employee for exempt withholding.
Claiming exempt is appropriate only when an employee meets the legal requirements established under Alabama law. If those requirements are not met, state income tax should be withheld from wages.
Potential Consequences for Employees
Improperly claiming exemptions or failing to have the correct amount of tax withheld can become costly.
Employees who overstate the number of exemptions on Form A-4 may be subject to a $500 civil penalty under Alabama law, in addition to any taxes, penalties, and interest owed when their tax return is filed.
Employees who have taxable wages but little or no Alabama withholding may also face additional tax due at filing, along with applicable penalties and interest assessed by the Alabama Department of Revenue.
Potential Consequences for Employers
Employers also have compliance responsibilities. Employers should also remember that a Federal Form W-4 does not replace the Alabama Form A-4. If an employee claims eight or more exemptions, additional reporting to the Alabama Department of Revenue is required, and failure to submit those certificates within the required timeframe may result in a $50 penalty per certificate.
Best Practices
A few simple payroll procedures can help reduce compliance risks:
- Require every new hire to complete a valid Alabama Form A-4 before processing payroll.
- If no A-4 is received, withhold using zero exemptions as required by law.
- Review exemption certificates for completeness and reasonableness.
- Maintain signed A-4 forms with your payroll records.
- Prompt employees to submit an updated A-4 whenever their withholding situation changes.
Alabama's withholding rules are designed to ensure that the correct amount of state income tax is collected throughout the year. While employees may request changes to their withholding, neither employees nor employers have the option to simply eliminate state withholding unless the employee legally qualifies.
Following Alabama's Form A-4 requirements helps protect both your business and your employees from unexpected tax bills, penalties, and compliance issues down the road.
If you have questions about Alabama withholding requirements, Form A-4 completion, or payroll compliance, the FocusPay Solutions team is here to help. We're happy to answer questions, review payroll procedures, and help ensure your business remains compliant with Alabama payroll laws.
For more information on the above article or any accounting & outsourcing services, contact Amber Cochran Saxon at (334) 321-4729 or by leaving us a message below.
