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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: November 20, 2023
To outsiders, Alabama is best known for the intense rivalry between the Tigers and the Crimson Tide. As an Alabaman, you’re proud to point out that the state extends way beyond college football. You know about Huntsville being the rocket capital of the world and Mobile being the birthplace of Hank Aaron. However, as a small business owner, you can’t escape one fact. Whether you own the trendiest coffee shop in Montgomery or the oldest pub in Birmingham, you always have to deal with payroll taxes.
Federal payroll taxes
First and foremost, we have to give Uncle Sam his due. We’ll go through a quick overview of what you need to know when it comes to calculating federal payroll taxes. If you would like to see a more detailed explanation, we invite you to head on over to our comprehensive step-by-step guide.
- Calculate Gross Wages:
- For all your hourly employees, multiply their hours worked by the pay rate. Don’t forget to increase the rate for any overtime hours.
- For all your salaried employees, divide each employee’s annual salary by the number of pay periods you have.
- Don’t forget to add in other forms of compensation, such as commissions, tips, or bonuses, into gross wages.
- Calculate Any Pre-Tax Withholdings: If your employees contribute to HSA, 401(k) or other pre-tax withholdings, deduct the appropriate amount from their gross pay before you calculate payroll taxes.
- Deduct Federal Income Taxes: Federal taxes can range anywhere from 0% to 37% of taxable earnings. We won’t get into the nitty-gritty details here, but you can find further withholding information through the IRS website.
- Deduct and match any FICA taxes:
- Social Security tax, which is 6.2% of each employee’s taxable wages up until they reach $160,200 for the year. Employers also have to pay a matching 6.2% tax up to the wage limit.
- Medicare tax, which is 1.45% of each employee’s taxable wages up to $200,000 for the year. For any wages above $200,000, there is an Additional Medicare Tax of 0.9%, which brings the rate to 2.35%. Employers have to pay a matching 1.45% of Medicare tax, but only the employee is responsible for paying the 0.9% Additional Medicare Tax.
- Calculate the FUTA Unemployment Tax, which is 6% of the first $7,000 of each employee’s taxable income. Note that if you pay state unemployment taxes in full and on time, you are eligible for a tax credit of up to 5.4%, which brings your effective FUTA tax rate to 0.6%. It’s a whopping 90% tax savings! Only employers are responsible for paying the FUTA tax, not employees.
- Subtract Post-Tax Deductions, which can be anything from court-ordered wage garnishments to child support. Most of your employees won’t have post-tax deductions, but you still need to look out for them.
Alabama payroll taxes
Now that we’re done with federal taxes, let’s talk about Alabama state taxes, shall we?
The state has a progressive income tax, meaning the more money your employees make, the higher the income tax. The tax rate ranges from 2% to 5%.
In addition, depending on where in Alabama your employees live or work, certain cities also levy income taxes ranging from 0% to 2%.
Alabama state unemployment insurance (SUI)
Alabama doesn’t have state disability insurance, but it does have unemployment insurance, which covers those unemployed through no fault of their own. The wage base was $8,000 for 2023, and rates range from 0.2% to 5.4%. A new wage base has not been announced yet for 2023 and new rates will be published as soon as they are available.
If you’re a new employer (congrats on your new venture!), you’ll pay a flat rate of 2.7%.
Remember, paying your SUI in full and on time qualifies you to get a huge FUTA tax credit, so make sure you pay attention to the due dates.
Alabama payroll tax resources
Just in case you want to learn even more about Alabama payroll taxes, here are a few helpful links.
Alabama Department of Labor: (800) 361-4524 | Register Your Business | Employer FAQ
Alabama Department of Revenue: (334) 242-1170 | Withholding Tax | Tax Due Dates
Do you have employees nearby too? These might be helpful.
Time to write those paychecks!
You’re almost at the goal line! All that’s left to do after calculating your employee’s net pay is cut those checks. Just make sure you’re setting aside the amount your company needs to pay to avoid any FICA and UI tax fiascos.
You will need to use Form 941 to file federal taxes quarterly, and Form 940 to report your annual FUTA tax. You can pay taxes online using the EFTPS payment system. More details about employment tax due dates can be found here.
Other useful paycheck calculators
Employers in Alabama can use the straightforward calculator at the top of this page to calculate payroll (and necessary tax deductions). But occasionally, employers run into unique situations that call for a little more finesse with regard to paychecks. For instance, you may need to issue a final paycheck when an employee leaves for a different job. Or, if you reward employees with bonus pay — similar to regular wages — taxes must be withheld. So, if you need more help crunching the numbers, check out the additional calculators listed below.