The Alabama Department of Revenue (ALDOR) has issued new guidance clarifying when employers must withhold Alabama income tax from wages paid to nonresident employees, including remote workers. The notice, issued on August 25, 2026, confirms that Alabama withholding obligations generally depend on where services are physically performed rather than the employer’s location.
Alabama Adopts a Physical-Presence Approach
Under the guidance, employers should withhold Alabama income tax from wages paid to a nonresident employee only to the extent the wages are attributable to services physically performed in Alabama. If a nonresident employee performs no services in Alabama during the year, Alabama withholding generally is not required merely because the employer is located in Alabama.
The guidance provides important clarification for employers with remote workforces and employees who live and work outside Alabama.
Remote Employees Working Outside Alabama
ALDOR specifically states that when a nonresident employee performs all services outside Alabama, including remote work performed from another state, the wages are not considered Alabama-source income and Alabama income tax withholding is not required.
This clarification is particularly significant for employers that have adopted permanent remote work arrangements involving employees located outside Alabama.
Employees Performing Services in Alabama
When a nonresident employee performs services in Alabama, wages attributable to work performed in the state generally remain subject to Alabama income tax withholding unless an applicable statutory exception applies. Employers should maintain records supporting the amount of compensation allocated to Alabama services.
For employees who work both inside and outside Alabama, the Department advises employers to use a reasonable allocation methodology based on services performed in Alabama and maintain payroll records supporting that allocation.
30-Day Safe Harbor Highlighted
The guidance reminds employers of Alabama’s relatively new 30-day safe harbor, which exempts certain earnings from Alabama taxation when eligible out-of-state workers perform services in Alabama for 30 or fewer days during a calendar year.
The Department also notes that separate federal rules may apply to certain industries, including air carriers, interstate railroads, interstate motor carriers, and water carriers.
Prior Tax Tribunal Position Effectively Rejected
The guidance is notable because it departs from a controversial 2023 Alabama Tax Tribunal decision that suggested Alabama could tax certain nonresident remote workers based on their continued employment with an Alabama employer. Subsequent commentary indicates the Department will not follow that decision to the extent it conflicts with the new guidance.
Alabama Residents Remain Fully Taxable
The notice does not change the rules for Alabama residents. Alabama residents remain subject to Alabama income tax on their taxable income regardless of where the income is earned.
Employers Impacted
The guidance is particularly relevant for:
- Alabama employers with remote employees located in other states;
- Multi-state employers with employees working in Alabama and elsewhere;
- Employers using hybrid work arrangements; and
- Payroll and tax professionals responsible for withholding compliance.
Employer Takeaway
Employers should review payroll withholding practices for nonresident employees and confirm that withholding determinations are based on where services are physically performed. Businesses with remote workers outside Alabama may wish to reassess whether Alabama withholding remains appropriate and ensure they maintain sufficient records to support wage allocations for employees working in multiple states.