Alabama Tax and CPA Services: State, County and City Taxes

Alabama has a graduated income tax with only three rates, a deduction for federal income tax paid that few states offer, a privilege tax that businesses owe just for being registered, and occupational taxes in cities such as Birmingham. If you live in Alabama, earn income from Alabama work or property, or run a business or payroll there, the rules below are the ones that matter most. We serve Alabama clients remotely from our Naperville, Illinois office.

Individual income tax

Alabama taxes residents on income from all sources and nonresidents on Alabama-source income. For single filers, heads of family and married persons filing separately, the first $500 of taxable income is taxed at 2 percent, the next $2,500 at 4 percent, and everything over $3,000 at 5 percent. For married couples filing jointly the breakpoints are $1,000, $5,000 and $6,000. Because those thresholds are so low, most taxable income lands in the 5 percent bracket.

Two features make Alabama different from most states. First, you can deduct federal income tax paid, which lowers Alabama taxable income. Second, Alabama has a list of exempt income that includes federal Social Security benefits, Railroad Retirement benefits, military retirement pay, civil service and state retirement system benefits, and payments from qualifying defined benefit plans. IRA and 401(k) distributions do not appear on that list, so retirement withdrawals need individual review.

New for 2026 through 2028: taxpayers can deduct the overtime premium portion of their pay (the amount above the base rate), up to $1,000 per taxpayer each year, whether or not they itemize. Employers report the premium in box 12 of Form W-2 with code TT.

Part-year residents report only income earned while living in Alabama. Nonresidents file Form 40NR if they have Alabama-source income above their prorated exemption. Returns are due on the federal due date, with an automatic extension to October 15 for filing but not for paying. Many Indian-American taxpayers who work on H-1B or OPT visas, or who moved to Alabama mid-year, fall into the part-year category.

Business taxes

Alabama imposes a business privilege tax on corporations, LLCs and other entities for the privilege of being organized or doing business in the state. It is owed every registered year until the entity is dissolved or withdraws, even if the business is inactive. Entities whose tax comes to $100 or less are exempt and need not file. Corporations file Form CPT and S corporations and LLCs file Form PPT, due with the federal return. A new entity files an initial return, Form BPT-IN, within two and a half months, and that deadline cannot be extended.

Partnerships and S corporations may elect to be an Electing Pass-Through Entity for tax years beginning on or after January 1, 2021. The election is made by checking a box on Form 65 or Form 20S, and the entity files Form EPT, due March 15 for calendar-year filers. It is one way to work around the federal cap on the state and local tax deduction; see SALT deduction and property taxes.

Sales and use tax

The general state rate is 4 percent, according to the Alabama Department of Revenue. The state food rate fell to 2 percent on September 1, 2025. Automotive sales are taxed at 2 percent and manufacturing machinery at 1.5 percent. Counties and cities add their own taxes of between 0.10 and 5 percent, and some are collected by the state while others are self-administered, so a seller may file with several offices.

Out-of-state sellers can join the Simplified Sellers Use Tax program, which collects a flat 8 percent on all Alabama sales regardless of local rates. That program is for sellers who volunteer; those with a legal obligation to collect follow the regular rules. See sales tax nexus and our sales tax service.

Payroll in Alabama

• Withholding: register and file through My Alabama Taxes. See state income tax withholding.
• Unemployment insurance: run by the Alabama Department of Workforce. State tax applies to the first $8,000 of each employee's wages. A newly liable employer pays 2.70 percent, and experience-rated employers pay between 0.20 and 6.80 percent. An employer becomes liable after having workers in 20 different weeks of a year or paying $1,500 in any calendar quarter.
• New hires: report within seven days of hire. See new hire reporting.
• Workers' compensation and paid leave: coverage rules are separate from the tax accounts above; see our workers' compensation overview and state paid leave guide.

City, county and local taxes

Alabama does not collect local occupational taxes; cities set and run them. Birmingham, for example, collects sales and occupational license taxes through its Finance Department's Tax and License Division, and an employee who works inside such a city may have local tax withheld by the employer. Local sales taxes also vary by address, and the Department of Revenue publishes a rates file for every city and county that levies one. Our guide to local payroll taxes by city and county explains how local withholding works.

How we can help

We prepare Alabama resident, part-year and nonresident returns, evaluate whether the pass-through election saves tax, help new businesses sort out privilege tax filings, and set up payroll with the right state and city accounts. If you receive a letter from the Alabama Department of Revenue, see state tax notices and representation. Contact us to talk through your situation; this page is general information.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.