Southern exception
Which Alabama cities charge an occupational tax?
Alabama is not typically associated with local income taxes, but several cities in the state levy an occupational tax. Birmingham is the largest and most prominent, charging 1% on gross compensation. Other Alabama cities with occupational taxes include Bessemer, Fairfield, Gadsden, Opelika and several smaller municipalities. The rates vary by city — some are 1%, others are higher or lower.
The term "occupational tax" or "occupational privilege tax" is Alabama's legal name for what other states call a local income tax or earnings tax. Despite the different terminology, the mechanics are similar: a percentage of gross earned income is withheld by the employer and remitted to the city.
For the current rate in any specific Alabama city, check the city's finance department or license division directly, as rates can be adjusted by city ordinance.
How does the Birmingham occupational tax work?
Birmingham's 1% occupational tax applies to gross compensation for services performed within city limits. This includes wages, salaries, commissions, bonuses and tips. It does not apply to investment income, pensions or Social Security.
Employers within Birmingham must register with the city and withhold the 1% from employee paychecks. The tax applies to both residents and nonresidents — if you live in Hoover or Vestavia Hills but work in downtown Birmingham, you owe the 1% on your Birmingham-source wages.
Self-employed individuals who perform services within Birmingham must file and pay the occupational tax on net self-employment income earned in the city.
How does the tax interact with Alabama state income tax?
Alabama charges a graduated state income tax with rates of 2%, 4% and 5%. The city occupational tax is a separate levy on top of the state tax. There is no credit or offset between them. A Birmingham worker pays both the 1% city tax and the state income tax, plus federal income tax and FICA.
Alabama's standard deduction and personal exemptions reduce the state tax base but generally do not affect the city occupational tax, which is calculated on gross compensation before most deductions.
What about remote workers?
The occupational tax is based on where the work is performed. If you work from home outside Birmingham city limits for a Birmingham-based employer, you generally should not owe the city tax on those remote-work days. However, if your employer withholds Birmingham occupational tax on all wages regardless of work location, you would need to seek a refund from the city for the remote-work portion.
Unlike Ohio or Philadelphia, Alabama cities have less established procedures for remote-worker refunds. Contact the specific city's tax or license office for guidance on the refund process.
What if your employer does not withhold?
If your employer is located outside a taxing city and does not withhold the occupational tax, you are responsible for filing and paying directly with the city where you work. Birmingham and other cities have their own filing requirements and deadlines. Failure to file can result in penalties and interest. If you perform work in multiple Alabama cities, you may owe occupational tax to each one separately based on income earned in each jurisdiction.
Are nonresidents who commute into an Alabama city subject to the tax?
Yes. Alabama's occupational tax is based on where the work is performed, not where the worker lives. If you reside in an unincorporated area or a city without an occupational tax but commute to Birmingham, you owe Birmingham's 1% on your wages earned there. Your employer withholds it automatically. Workers who split their time between multiple Alabama cities with different occupational tax rates may owe tax to each city proportionally, based on wages earned in each jurisdiction. Alabama cities do not offer a credit to prevent double taxation if you live in one taxing city and work in another, though the tax in each city applies only to wages earned within that specific city's limits.
How does the occupational tax filing and refund process work?
For most W-2 employees, the process is invisible: the employer withholds the occupational tax and remits it to the city. You do not need to file a separate return with the city. However, if you believe you have been over-withheld (for example, your employer withheld Birmingham tax on days you worked from home outside city limits), you can file a refund request directly with the city's finance department. Self-employed individuals who earn income within a taxing city must file and pay the occupational tax themselves, usually on an annual basis. Contact the specific city's revenue or license office for current filing deadlines and refund forms, as each Alabama city administers its own tax independently.
What does the tax burden look like for a Birmingham worker?
Worked example: $55,000 salary, single filer, Birmingham resident
| Tax layer | Approximate amount |
|---|---|
| Federal income tax | ~$5,100 |
| FICA (employee share) | ~$4,208 |
| Alabama state income tax (graduated) | ~$2,100 |
| Birmingham occupational tax (1%) | ~$550 |
| Estimated take-home | ~$43,042 |
Illustrative example. Alabama allows deduction of federal income tax on state return, which reduces state liability. Use our Alabama take-home calculator for a personalized estimate.
Alabama is unusual in that it allows taxpayers to deduct federal income taxes paid on their state return, which lowers the effective state rate. The 1% occupational tax in Birmingham adds a modest but noticeable layer on top. Combined, the state-plus-local burden in Birmingham is lower than in most Ohio or Pennsylvania cities, making Alabama cities relatively competitive on an after-tax basis despite the occupational tax.
How does the occupational tax interact with Alabama's federal tax deduction?
Alabama is one of only three states that allow a full deduction of federal income taxes paid on the state return. This unique feature reduces the effective state income tax rate significantly. However, the city occupational tax is calculated on gross compensation before any deductions, including the federal tax deduction. The occupational tax is a simple percentage of gross wages — no deductions reduce the base. This means the occupational tax is slightly more regressive than the state income tax.
Questions
Alabama occupational tax FAQ
What is the Birmingham occupational tax rate?
Birmingham charges a 1% occupational tax on gross compensation for services performed within city limits. This applies to both residents and nonresidents working in Birmingham. Employers withhold it from paychecks.
Do all Alabama cities have an occupational tax?
No. Only certain Alabama cities levy an occupational tax. Birmingham is the largest. Other cities include Bessemer, Fairfield, Gadsden and Opelika. Many Alabama cities and rural areas have no local income or occupational tax.
Does the occupational tax apply to investment income?
No. Alabama occupational taxes apply to earned income only: wages, salaries, commissions, bonuses and tips. Investment income, pensions, Social Security and rental income are generally not subject to the occupational tax.
Can I deduct the occupational tax on my federal return?
Yes. The occupational tax qualifies as a state and local income tax for purposes of the federal SALT deduction, subject to the $10,000 cap for most filers.
Is the Alabama occupational tax the same as a business license?
They are related but distinct. Alabama cities often require businesses to obtain a business license AND withhold the occupational tax. The business license is a flat fee or tiered charge on the business. The occupational tax is a percentage of employee wages. Both may be administered by the same city department but they are separate obligations.
Do nonresidents who commute to Birmingham owe the occupational tax?
Yes. The Birmingham occupational tax applies to anyone who earns income within city limits, regardless of where they live. If you commute from Hoover, Vestavia Hills or any other suburb to a job in Birmingham, you owe the 1% on your Birmingham-source wages. Your employer withholds it from your paycheck just as they would for a Birmingham resident.
How do I file for a refund if my employer over-withheld the occupational tax?
If your employer withheld Birmingham occupational tax on wages not actually earned within city limits (for example, days worked remotely from a home office outside Birmingham), you can file a refund request with the city's finance or license department. You will need documentation showing the days or portion of wages earned outside the city. Each Alabama city that levies the tax has its own refund procedures, so contact the specific city directly for forms and deadlines.
- Sources: City of Birmingham Finance Dept. · AL Dept. of Revenue · AL Code Title 11.
- Last updated July 31, 2026
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