Alabama Withholding and Unemployment Tax
From Tax Guide.
Tax Guide · Arab, Alabama
Local Occupational Taxes in Alabama: City and County Payroll Tax
Some Alabama cities and counties charge their own occupational tax on wages. Learn how it differs from state tax and what employers need to check.
The short answer
What is an occupational tax in Alabama?
An occupational tax is a local tax that some Alabama cities and counties charge on wages earned by people who work within their limits.
It is separate from federal income tax and separate from Alabama state income tax. A paycheck can therefore have three layers of income-based tax: federal, state and, where it applies, a city or county occupational tax.
Not every place has one. Whether a tax applies depends on where the work is performed, and each locality sets its own rules, so employers cannot assume that what worked in one town applies in the next.
Who is affected
Do employers have to withhold city or county payroll tax?
In places that levy an occupational tax, employers are generally required to withhold it from employee pay and send it to the local government.
The rules are set locally, not by the state, so they can differ in who is covered, how often the employer reports and how the money is paid. Some places tax the employer's own net profits too, which is a separate question from employee wages.
Because the tax follows the location of the work, an employer with staff in more than one city or county may need to track each place separately. That is easy to overlook when payroll is set up for the first time. Our guide to hiring your first employee includes this among the local items to confirm.
The safest step, whenever you open in a new place, is to ask the city or county revenue office directly whether a tax applies and what it requires. Then make sure your payroll system reflects the answer.
Remote and traveling employees add another wrinkle. If an employee works partly in one city and partly in another, or works from home in a different place than the business office, it may not be obvious which local rules apply. Write down where each employee actually performs the work and keep that with your payroll file, so you can answer a local revenue office if it asks.
Comparing taxes
How is an occupational tax different from state and federal payroll taxes?
An occupational tax is local, set by a city or county, and it is separate from the federal and state payroll taxes that appear on every paycheck.
The table shows how the layers differ in general terms. It does not show any rates, since those are set by each government and change.
| Tax | Who sets the rules | Who collects it |
|---|---|---|
| Federal income tax withholding | Federal government | IRS |
| Social Security and Medicare | Federal government | IRS |
| Alabama income tax withholding | State of Alabama | Alabama Department of Revenue |
| Occupational tax | City or county, where one exists | The local government |
General comparison. Local rules vary from place to place.
Employee view
Why did a local tax come out of my paycheck?
If a city or county occupational tax appears on your pay stub, it is because your employer is withholding it under a local law for the place where you work.
Look at the pay stub description and the location of your worksite. If you live in one place and work in another, the tax usually follows the place of work, though local rules vary. If you are unsure whether the withholding is correct, ask your employer's payroll contact first, and then check with the local revenue office.
Local taxes can also affect how you think about your income on your tax return, so bring the year-end forms when you come in. Our guide to how to file taxes in Alabama explains the state return.
Staying compliant
What should an Alabama employer check about local taxes?
Check whether your location has a tax, what it applies to, how often you report and how the payment is made.
A short checklist keeps this from slipping through the cracks.
- Ask the city and county revenue offices whether an occupational tax applies where your employees work.
- Find out whether it applies to wages, to business profit, or both.
- Confirm the filing frequency and payment method.
- Add the local tax to your payroll setup and your calendar.
- Keep the payment records with your other payroll files.
How we can help
How Melton Tax Services can help with local payroll taxes
Our payroll and bookkeeping service can help you sort out which taxes apply to your payroll and keep the records straight.
We can help with running payroll and organizing the records, and we check how local and state rules apply to your business. See our payroll and bookkeeping page, or read Alabama withholding and unemployment tax for the state side.
To talk about your business, contact us or call 256-586-4635. We serve Arab and the surrounding area. Please do not send Social Security numbers or documents through this website. Bring them by the office or call us.
Answers
Questions about local occupational taxes
Does every Alabama city have an occupational tax?
No. Some Alabama cities and counties have one and others do not. The only reliable way to know is to ask the local revenue office where the work is performed.
Is an occupational tax deductible?
It may be deductible in some situations, depending on how you file and what the tax is. That is worth going over at tax time, because the treatment can differ between an employee and a business owner.
Does the tax apply where I live or where I work?
It generally follows where the work is performed, though local laws differ. If you live in one place and work in another, check the rules for both, or ask us to help.
Who pays the occupational tax, the employer or the employee?
The employee generally bears the tax through withholding, and the employer collects and sends it to the local government. Some localities also tax the business itself.
Is the occupational tax the same as a business license?
Not necessarily. A business license and an occupational tax are separate things in many places, though some localities handle them together. Ask the local office what applies to you.
What if my employer never withheld a local tax?
Talk with your employer first and then the local revenue office. If a notice arrives, do not ignore it, keep a copy, and call the office so we can review it with you.
Read next
Related reading
Payroll Taxes Explained: FICA, Withholding and More
From Tax Guide.
How Payroll Works for a Small Business
From Tax Guide.
Hiring Your First Employee: Tax and Paperwork Guide
From Tax Guide.
Payroll and Bookkeeping
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
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