How Alabama withholds on a bonus
Alabama's withholding instructions let an employer withhold a flat 5% on supplemental wages paid separately from regular pay, which is the state's top income tax rate and the rate nearly all Alabama wages face anyway. Combined with the federal 22% and 7.65% FICA, the percentage method takes 34.65% of a bonus: on $10,000, that is $2,200 federal, $620 Social Security, $145 Medicare and $500 Alabama, leaving $6,535.
Under the aggregate method the bonus is added to a regular paycheck and both federal and Alabama withholding are computed on the combined amount. For Alabama the difference is small, because 5% already applies to almost everything; the federal side is where aggregate withholds more, about $2,700 rather than $2,200 on a $10,000 bonus for a $60,000 earner paid every two weeks.
Alabama allows federal income tax paid to be deducted on the state return, so the extra federal withholding on a bonus slightly reduces Alabama tax for the year. Birmingham's 1% and Gadsden's 2% occupational taxes apply to a bonus earned in those cities and are not included here.
What the withholding means for your Alabama return
A $60,000 single filer in Alabama has a federal marginal rate of 12% up to $50,400 of taxable income and 22% above, and an Alabama marginal rate of 5%. The 22% federal withholding on a bonus is therefore several points above the rate most of it will finally be taxed at, and the excess comes back as part of the refund; the 5% Alabama withholding matches the state rate and settles close to even. The Alabama paycheck calculator shows the marginal rates for any salary.