Payroll Taxes in Jefferson County, Alabama: A Detailed Guide

Living in Jefferson County, Alabama and trying to navigate payroll taxes for your business? As a fellow resident and small business owner myself, I know how confusing payroll taxes can be. But don’t worry, I’m here to break it all down for you in this detailed guide!

What is Payroll Tax?

Simply put, a payroll tax is a tax that employers have to pay on the wages and salaries they pay to employees. The money from these taxes goes to pay for federal programs like Social Security and Medicare.

There are both federal payroll taxes (that all employers in the U.S. have to pay) as well as state payroll taxes (that vary by state).

Some key federal payroll taxes include:

• Social Security Tax – This is 6.2% paid by the employer and 6.2% withheld from the employee’s paycheck. In 2019, this tax applied to the first $132,900 in employee wages.

• Medicare Tax – This is 1.45% paid by the employer and 1.45% withheld from the employee. There is no wage limit for Medicare tax.

• Federal Unemployment Tax (FUTA) – Employers pay 6% of the first $7,000 in wages per employee annually. Rates can be lower if the state has programs that align with FUTA.

Different states also have their own taxes for programs like disability insurance, family leave, and unemployment insurance. Alabama is no exception.

Payroll Taxes in Alabama

In addition to federal payroll taxes, employers in Alabama need to pay:

Alabama Unemployment Tax (AUTA)

• Paid by employers to provide temporary income to workers who lose their job.

• Rates range from 0.59% to 6.74% on the first $8,000 of annual wages based on employer history.

Alabama State Disability Tax

• Paid by employers to provide short-term disability benefits for non-work related injuries.

• The tax rate is .42% of the first $8,000 in wages.

Alabama Workmen‘s Compensation Insurance

• Employers with 5+ employees must have work comp insurance to cover job-related injuries and illnesses. Premiums vary based on company risk factors.

Alabama New Hire Reporting

• Employers must report all new hires to the Alabama New Hire Act within 7 days of hiring. This helps state agencies enforce child support orders.

Alabama State Payroll Tax

• This is the big one in Alabama! More details below.

Alabama State Payroll Tax

Alabama has a state payroll tax that all employers need to pay for any employees who work primarily in Alabama. Here are the key things you need to know:

• Tax Rate – The tax rate is 6% of the first $8,000 in annual wages paid to each employee. This means the maximum tax for each employee would be $480 per year.

• Withholding – Employers must withhold 6% from each employee’s wages and remit the tax to Alabama. If you have 10 employees, you would withhold and remit $480 per employee based on their first $8,000 in wages.

• Employer Share – Employers also have to pay 6% themselves on the first $8,000 of wages per employee. So you pay 6% and withhold 6% from each employee.

• Self-Employed – If you are self employed or an owner/member of an LLC, you have to pay state payroll tax at the rate of 9% of the first $8,000 in annual net earnings.

• Exemptions – Some employees may be exempt from state payroll tax such as certain non-residents, railroad employees, insurance agents, and real estate agents.

• Reporting – Payroll taxes are paid on a quarterly basis. You must file returns and remit taxes by the end of January, April, July and October for each quarter. An annual reconciliation is also required.

Let’s look at a quick example:

You have 5 employees. 2 employees earn $30,000 per year. 3 employees earn $10,000 per year.

• For the employees earning $30,000, you would withhold $480 (6% of $8,000) and remit $480 yourself for each employee.

• For the employees earning $10,000, you would withhold and remit $600 each (6% of $10,000).

• In total for the quarter, you would remit $2,760 in payroll taxes to the state ([$480 x 2 employees] + [$600 x 3 employees]).

Do Cities & Counties in Alabama Have Payroll Taxes?

While Alabama as a state has a payroll tax, cities and counties in Alabama do not have their own local payroll taxes. However, some Alabama cities do have occupational license fees that businesses must pay each year.

For example, the City of Birmingham requires businesses to purchase an annual license based on their gross receipts:

So businesses in Birmingham need to factor these license fees into their budget on top of state payroll taxes.

Avoiding Payroll Tax Penalties

Now that you know about the various federal, state, and local payroll taxes in Alabama, it’s crucial that you file returns and make payments on time each quarter and year. Unfortunately, the penalties for noncompliance can be steep:

• Late filing penalty – 10% of the unpaid tax due for each month the return is late (up to 50% maximum)

• Late payment penalty – 1% of the unpaid taxes for each month they are late

• Interest charges – Interest is charged based on the federal short-term rate + 3% on unpaid taxes and accrues daily

Yikes! As you can see, you don’t want to mess around with payroll taxes. My advice is to speak with an accountant or payroll professional to make sure you are doing everything correctly. They can also handle the filings and payments for you to take it off your plate.

Final Thoughts

I hope this guide gave you a good understanding of the payroll taxes you’ll need to deal with in Jefferson County and throughout Alabama. Payroll compliance can seem intimidating, but taking it step-by-step and getting help where needed will set your business up for success. Let me know if you have any other payroll or tax questions!