The Employer’s Guide to Hiring Employees in Alabama

Are you getting ready to hire your first employee in Alabama? Before you jump into writing a job description, take some time to review your state’s hiring process and employer obligations.  Keep reading for guidance on everything from new hire paperwork to taxes. 

Here are five steps to hiring employees in Alabama:

Step 1: Take care of logistics

Before hiring employees in Alabama, register with the relevant state departments. Make sure you complete these four tasks:

Apply for a federal employer identification number (EIN) on the IRS website

When you hire employees, you have to register with the Internal Revenue Service (IRS) as an employer. That involves obtaining a federal employer identification number (EIN), also called a federal tax ID. You can apply for an EIN on the IRS website by completing an application. 

If your business is registered as a partnership, multi-member limited liability company (LLC), C corporation, or S corporation, you already have an EIN, but if you’re a sole proprietorship or single-member LLC, you probably still need to get one. 

Register with the Alabama Department of Revenue

If you haven’t done it already, you need to register your business with the Alabama Department of Revenue to pay state taxes. That includes state income withholding tax, which you’ll withhold from your employee’s wages.

Register online with My Alabama Taxes (MAT). You’ll receive an account number within three to five days of registering. For additional information on the process, read MAT’s FAQs. 

Register with the Alabama Department of Labor

Alabama employers also need to register with the Alabama Department of Labor to pay unemployment insurance taxes. In Alabama, you’re subject to unemployment compensation taxes if:

• You paid wages of $1,500 or more during a calendar quarter in the current or preceding calendar year or
• You employed at least one person for some portion of the day in each of 20 different weeks during the current or preceding calendar year. 

You can open an Alabama Unemployment Tax Account by completing this form. For more guidelines on unemployment insurance taxes, check out the Department of Labor’s employer FAQs.

Register for workers’ compensation insurance

If you’re only hiring one employee in Alabama to start, you don’t need workers’ compensation insurance. However, Alabama employers with five or more part-time or full-time employees must obtain workers’ compensation insurance, which financially and medically supports employees who get injured on the job. This coverage also protects you from lawsuits and liability as an employer. 

To get workers’ compensation insurance in Alabama, you have three options: 1) get insurance through an approved commercial insurance carrier, 2) get coverage through a group self-insurance fund, or 3) become self-insured (if you qualify). 

For resources and information on workers’ compensation, review the Department of Labor’s website. 

Want to optimize your workers’ comp policy? Learn our top strategy. 

Register for Alabama city taxes

There are a few cities in Alabama that levy local occupational taxes. As an employer, if you have employees in those cities, you may need to withhold additional income tax from their wages. 

Here are the four cities that impose local taxes:

1. Bessemer: tax rate is 1% of earned income. 
2. Birmingham: tax rate is 1% of earned income. 
3. Gadsden: tax rate is 2% of earned income. 
4. Macon County: tax rate is 1% of earned income. 

Visit the city websites linked above to learn more about how and when to pay local occupation taxes. 

Step 2: Understand your hiring costs and tax liability 

When you become an employer, your costs go up. Not only do you have to account for recruiting expenses and your employee’s compensation package, but you also have to budget for employer taxes. 

Here are the key federal and state employer taxes Alabama employers need to know about: 

• Under the Federal Insurance Contributions Act (FICA), the Social Security tax rate is 6.2% for an employer and 6.2% for an employee. The rate for Medicare taxes is 1.45% for an employer and 1.45% for an employee. 
• The annual state unemployment insurance (SUI) tax rate for new employers in Alabama is 2.7% on a wage base of $8,000.
• The Federal Unemployment Tax Act (FUTA) works alongside state unemployment insurance programs. The FUTA tax rate is 6% on the first $7,000 of employee wages. However, if you pay SUI taxes on time and in full, you can get a credit on FUTA taxes of up to 5.4%, potentially dropping your FUTA tax liability to 0.6%. 
• If you have employees, you have to withhold state income tax from their pay. For additional information on withholding rates and filing deadlines, check out the Alabama Department of Revenue website.
• If you have employees who live in Bessemer, Birmingham, Gadsden, or Macon County,  you’re also required to pay local occupational taxes. Check with your city’s Department of Revenue for more information. 
• As an employer, you have to file federal income tax withholding reports to the IRS using Form W-2. You’ll also file Form 941 on a quarterly basis and Form 940 annually. 
• Alabama employers must file withholding tax returns and pay taxes on a monthly, quarterly, or annual basis. Download the forms here. 

Do you have enough money to hire an employee in Alabama? Use this calculator to find out. 

Step 3: Check Alabama labor laws 

It is critical that employers follow state and federal labor laws. You need to understand classification differences between full-time employees and independent contractors, wage and hour laws, pay transparency and reporting regulations, pay equity laws, and special state employment considerations. 

Here are a handful of important Alabama labor laws:

• Alabama has no state laws regarding minimum wage. However, Alabama employers have to abide by federal law, which says the minimum wage is $7.25/hour. 
• Per federal law (the Fair Labor Standards Act), non-exempt Alabama employees who work more than 40 hours during a workweek must be paid overtime pay. 
• Alabama is an employment-at-will state, meaning employers have the right to fire employees at any time without reason or cause. Employees also have the right to quit their jobs at any time without reason or warning.  
• There’s no Alabama law that requires employers to provide unpaid or paid break time at work, sick leave, vacation, or severance. What you offer employees is up to you as an individual employer. (However, research shows employee benefits help your bottom line, improving employee satisfaction and raising retention rates.)
• Alabama has a variation on a salary history ban law that prevents employers from discriminating against job candidates based on whether or not they provide details about their salary history. 
• Alabama’s Clarke-Figures Equal Pay Act prohibits Alabama employers from wage discrimination based on race or sex. 
• Under the Equal Employment Opportunity Commission’s federal anti-discrimination law, Alabama employers cannot discriminate against job candidates or employees on the basis of age, race, sex, religion, national origin, or disability, or genetic information.

Want to compare employment laws by state? Check out Gusto’s state-by-state guide to pay equity laws and state-by-state guide to salary history laws. 

Step 4: Fill out the Alabama new hire reporting form and other hiring documents

Like all states, Alabama has a new hire reporting requirement. When you hire new employees in Alabama, you need to report information about them to the Alabama Department of Labor within seven days of the employee’s official date of hire. 

New hire reporting is designed to stop unemployment compensation payments to people who’ve returned to work and help locate parents who are delinquent in their child support obligations.

The hiring date is generally considered to be the first date an employee performs services you’ll pay them for, or the first day an employee on commission is eligible to earn commission. You have to report both newly hired employees and rehired employees. 

Register here to begin the new hire reporting process. Make sure you have your employee’s name, address, Social Security number, date of birth, and work start date on hand. For more information, check out these new hire reporting FAQs.

Once you report your new hires, take the time to complete these other important hiring documents, including:

• Employment contract: Write an employment contract detailing the job responsibilities your employee will have, the wages you’ll pay, and the workplace policies available in your employee handbook. 
• Form I-9: The US Citizenship and Immigration Services (USCIS) uses Form I-9, the Employment Eligibility Verification Form, to verify that employees are able to work in the US. As an employer, you have to complete the I-9 form for every employee you hire, and each employee must attest to their employment authorization. You don’t have to file Form I-9 with the USCIS or Immigration and Customs Enforcement (ICE). Instead, you hold onto the form as a record for at least three years from the date of hire or from one year after employment ends. Download Form I-9 and read the completion instructions here.
• Form W-4: Each new employee you hire needs to complete IRS Form W-4, The Employee’s Withholding Certificate, on or before the date of their employment. Form W-4 determines how much federal income tax will be withheld from the employee’s paychecks. Download the form.
• Form A4: You also need to give employees Form A4, the Alabama Employee’s  Withholding Tax Exemption Certificate, to fill out. 

It’s crucial for employers to maintain records as required, so make sure you keep copies of the above documents.

Need help determining withholdings for your employees? Use Gusto’s Alabama hourly paycheck and payroll calculator and Alabama’s salary paycheck and payroll calculator.

Step 5: Display labor law posters and required notices

The state of Alabama requires employers to post federal and state labor law signs in the workplace. These notices keep employees informed of their rights and duties on the job. 

Take a look at Alabama’s posting requirements to see which notices you’re obligated to post and how to download them. And don’t forget to download (and properly display) all the required federal labor law posters from the US Department of Labor as well. 

Use Gusto for easier payroll 

Now that you’re an employer, it’s helpful to find new ways to simplify your operations. One strategy: upgrade your payroll software to Gusto. Our full-service payroll platform helps you pay employees on time and file business taxes with less hassle. Ready to get started? Create an account today.