Summary
Explains, through a composite example, what an Alabama charging order under Ala. Code 10A-5A-5.03 generally gives a judgment creditor of one LLC owner: a lien on the transferable interest and the right to distributions on it, no access to company property through that remedy, no membership or management rights, and no foreclosure. Covers the owner’s retained member rights and duties, the exclusive-remedy and foreclosure limits, and five operating-agreement checks. Single-member LLCs are outside the article’s scope.
By: Jordan Gerheim, CEO – Outside Chief Legal LLC
Picture a service company near Mobile that pays a technician $20 an hour. One week she works 45 hours. Her five overtime hours are paid at $30, which is $150. The premium is the extra $10 an hour, or $50. If payroll only shows “overtime: $150,” someone has to work backward to find the $50. Now multiply that by every employee and every week of the year, and the question gets bigger fast. This is a composite example, not a real business.
That gap is why the Alabama overtime deduction is worth a look from employers. Employees claim it, but the records behind it start in your payroll system.
Quick answer: Alabama now allows a deduction of up to $1,000 a year for qualified overtime pay, for tax years 2026 through 2028. Employees claim it, not employers. Federal W-2 reporting for 2026 asks employers to show qualified overtime separately, and that number comes from your payroll records. Talk to your CPA and payroll provider now, not in January. The rest of this post explains why, and what to ask.
What does the Alabama overtime deduction cover?
Governor Kay Ivey signed HB527 in April 2026. According to the Governor’s office, it provides an income tax deduction for qualified overtime compensation, up to $1,000, for tax years 2026 through 2028. The Alabama Department of Revenue (ADOR) lists it as Act 2026-604.
Three details matter to an employer.
- Only the premium counts. ADOR says only the premium portion of overtime wages is deductible, which is the amount above the employee’s base rate. On time-and-a-half, that is the “half.”
- It is tied to overtime rules. Alabama sources describe qualified overtime as overtime pay that exceeds the employee’s regular rate. How Alabama applies that in each case is a question for ADOR and your CPA.
- The employee claims it. ADOR says the deduction is available whether or not the taxpayer itemizes. The limit is the lesser of the actual overtime premium or $1,000 per taxpayer.
One more point, so the rules stay separate. This is Alabama’s deduction. There is a separate federal deduction with its own rules and its own limits. This article is about the Alabama side, plus one federal reporting point that touches your payroll.
Why does the deduction start in payroll and not at tax time?
An employee cannot deduct a number that nobody can find. At filing time, the employee looks at the W-2.
Here is where the federal rule comes in. The IRS says that beginning in 2026, employers report qualified overtime compensation on Form W-2, Box 12, using code TT. ADOR describes similar reporting and says the Box 12 information does not change wages, withholdings, or taxes on the W-2. It is information for the employee to use.
Federal W-2 reporting is separate from Alabama’s rules. ADOR’s guidance also mentions Box 16, so confirm exactly what to report with your payroll provider and ADOR. The 2026 W-2s are due to employees by the W-2 furnishing deadline, and the data comes from pay periods that are happening now.
The Department of Labor also says the regular rate can include more than base pay, with certain exceptions. So the true premium can differ from the technician example above.
Which payroll gaps are worth checking before year-end?
Each of these is a question that is easier to answer in October than in January. None needs a big project. Most start with one report and one phone call.
Does your system show more than one overtime total?
Ask whether your system tracks overtime hours, overtime pay, and the premium portion as separate figures. If it only shows a single overtime total, your provider may need to change a setting or run a report differently.
Could any employees be classified wrong?
Overtime pay rules generally apply to employees who are covered and not exempt. Whether someone is exempt is a legal question that generally turns on the facts, not only on a job title or on being paid a salary. A classification that is out of date can affect both the deduction record and your wage-and-hour exposure. A review now can help reduce that risk.
Do bonuses and shift pay change the regular rate?
The Department of Labor says the regular rate includes “all remuneration for employment,” with listed exceptions such as discretionary bonuses. If you pay production bonuses, shift differentials, or similar extras, ask your payroll provider how the system builds the regular rate and the premium.
Is any pay happening outside the system?
Manual checks, off-cycle runs, a second payroll for another entity, and hours added by hand can drop out of a report. Ask your provider whether every kind of pay you issue flows into the same overtime figures.
Who answers the employee questions?
Some employees will ask what the new box on the W-2 means. Decide now who answers. A short answer works well: here is what the form shows, and please talk to your tax preparer or ADOR about how to use it. An owner who starts giving tax advice to staff takes on a job nobody hired them for.
What should you ask your CPA and your payroll provider?
Bring these to the next call.
- Is our system set up to report qualified overtime in Box 12, code TT, for 2026? What should code TT include?
- How does it calculate the premium when bonuses or shift differentials are involved?
- Which of our employees are treated as non-exempt, and is that list current?
- Is there anything at ADOR that we need to set up for this year?
- Can we run a year-to-date overtime report now and check it against a few real paychecks?
Where does the legal side fit?
Payroll coding is not a legal document, but it sits right next to legal decisions. Who is exempt. What your handbook says about approving overtime. Whether your written policies match what actually happens on the floor.
At Outside Chief Legal, we look for the practical way to get a business owner to yes with the risk managed. Here, the practical step is small. Get the overtime data clean while the year is still open. Then, if a classification or policy question turns up, you already have the facts on the table.
If you would like a second set of eyes on how overtime is classified and documented in your business, a Risk-Free Strategy Session is the place to start. Your CPA and payroll provider handle the tax and system side. We can help with the legal side of the same questions.
FAQ
Who can claim the Alabama overtime deduction?
Employees claim it on their own Alabama returns. ADOR says it is available whether or not the taxpayer itemizes. Employers do not claim it, although employers may have federal W-2 reporting to handle.
What is the limit on the Alabama overtime deduction?
ADOR describes it as the lesser of the actual overtime premium or $1,000 per taxpayer, for tax years 2026 through 2028.
Does HB527 create a new tax or filing for employers?
The sources we reviewed describe an employee-side deduction, not a new employer tax. Employers may still have the federal W-2 reporting described above. Confirm current requirements with ADOR and your CPA.
Does the deduction apply to salaried employees?
It may depend on whether the employee is entitled to overtime pay. How Alabama defines qualified overtime for this deduction is a question for ADOR, so ask ADOR and your CPA. Classification is fact-specific, so ask an attorney about your situation.
General information only. This article is not legal or tax advice.
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