Alabama pay stubs: state income tax and local occupational taxes

State income tax

Alabama uses a graduated income tax with three rates: 2%, 4% and 5%. The brackets are narrow, so most of a typical worker's taxable income falls in the 5% band. The bracket widths double for married couples filing jointly. Employees tell their employer how much to withhold on Form A-4, Alabama's own withholding certificate.

One detail that sets Alabama apart: the state lets individuals deduct federal income tax paid when figuring their Alabama taxable income. The state withholding formula takes this into account, which is one reason Alabama withholding can look lower than the top rate suggests.

Other state payroll deductions

Alabama does not run a state disability insurance program or a paid family and medical leave program, and state unemployment insurance is paid by employers only. On a standard Alabama pay stub, the state section is usually just one line: state income tax.

Local taxes

This is where Alabama gets more involved. A number of cities levy an occupational tax (sometimes called an occupational license fee) on wages earned within their limits. Birmingham's is the best known, and Bessemer, Gadsden, Auburn and Opelika are among the other cities that charge one. The tax is based on where the work is done, so a person who lives outside Birmingham but works inside the city still has it withheld. Rates and rules differ by city, so confirm with the city's revenue office before setting up payroll.

Federal withholding still applies

State rules sit on top of the federal ones, not in place of them. Every Alabama paycheck also shows:

• Federal income tax, based on the employee's Form W-4.
• Social Security at 6.2% of wages, up to the annual Social Security wage base.
• Medicare at 1.45% of all wages, plus an additional 0.9% on wages above $200,000 in a calendar year.

Creating an Alabama pay stub with PayStubNest

Enter the hours worked and hourly rate, or an annual salary, and choose Alabama as the work state. The exact figures on each stub depend on the employee's pay, pay frequency, W-4 choices, deductions and year-to-date totals, so no two paychecks are quite alike. PayStubNest calculates all of it automatically, applying federal and Alabama withholding and carrying year-to-date totals forward from one stub to the next. You can preview a stub for free and only pay when you download it.

Record-keeping tip

If an employee splits time between a city with an occupational tax and one without, track hours by work location on each pay period. That makes the local line on each stub easy to back up later. For more help, see our guides or the Alabama Department of Revenue.