Alabama Contractor Taxes and Licensing: Materials Tax, Licenses and Workers' Comp

Alabama contractors who improve real property pay sales or use tax on the building materials they attach, either to the seller or directly to the Department of Revenue. The state rate is 4%, and counties and cities add local taxes of 0.10% to 5%, some collected by the state and some self-administered. Licensing splits by job type and size.

What sets Alabama apart for contractors?

Alabama runs two separate licensing tracks with very different dollar triggers. A residential remodeler needs a state license once a job tops $10,000, and a residential roofer at just $2,500, while a commercial builder doesn't need a general contractor license until the job hits $100,000. On the tax side, the headache is local: Alabama's city and county sales and use taxes can be administered by the state, by third-party companies, or by the city itself.

This page summarizes official Alabama sources as checked on 2026-10-19. It isn't tax or legal advice. Confirm with the Alabama Department of Revenue (ALDOR) and the right board, and work with a CPA who knows Alabama contractors.

Do contractors charge sales tax on labor in Alabama?

Alabama's sales tax is a tax on "gross proceeds of sale of tangible personal property," and ALDOR's pages don't list contractor labor on real property as taxable. Instead, the tax lands on materials. ALDOR defines a contractor as anyone who "contracts to make additions, alterations, or improvements" to real property, and that contractor "must pay sales tax to the Alabama vendor at the point of sale on materials so used or consumed." For repair labor on equipment or other personal property, check with the department; we found no official page addressing it directly.

How does Alabama tax contractor materials?

ALDOR Rule 810-6-1-.46 says "contractors or builders must pay either to the seller or directly to the Department of Revenue sales or use tax on" all building materials they attach to real property. In practice: pay tax at the supply house, or accrue use tax yourself when a vendor doesn't charge it (often an out-of-state supplier). See use tax for contractors.

Government jobs are the exception. Materials incorporated into real property under contracts with governmental entities awarded on or after January 1, 2014 are "exempt from all state, county, and municipal sales and use taxes provided the contractor or subcontractor has complied with all provisions" of ALDOR's rule, which involves getting a project exemption certificate before buying. Ask ALDOR for the current forms before you bid a public job.

For how Alabama's approach compares with states that tax labor, see sales tax on labor vs. materials.

What are Alabama's state and local sales tax rates?

The general state rate is 4%. ALDOR says "counties and municipalities may levy local sales taxes ranging in rate between .10% to 5%," and "some of the local sales taxes are collected by ALDOR, third party administrators, and others are self-administered." If you buy materials untaxed and use them in a city with a self-administered use tax, you may owe that city directly. Map out where your jobs are before you set up your filings.

Which Alabama contractor licenses do you need?

The General Contractors Board threshold rose from $50,000 to $100,000 under Act 2024-277, effective October 1, 2024. On a job at or above that line, the board says subcontractors "must be licensed before beginning work." For how dollar thresholds work in general, see our contractor license guide.

Local licensing: Alabama cities and counties issue business licenses, and building departments check state licenses at permit time. Check with each city where you work, since a job across town lines can mean another license.

What income and business taxes apply in Alabama?

Alabama's individual income tax is graduated. For single filers, ALDOR lists "2 percent on first $500 of taxable income," "4 percent on next $2,500" and "5 percent on all over $3,000"; joint filers hit 5% above $6,000. ALDOR's page doesn't state a tax year, so confirm the rates for your return. Corporations pay 6.5% of net income, with a deduction for federal income tax.

LLCs and corporations also owe the business privilege tax, from $0.25 to $1.75 per $1,000 of Alabama net worth, with a $50 minimum for tax years after 2022 and a $15,000 maximum. Plan your federal and state quarterly estimated taxes, and run a first pass with the quarterly estimated tax calculator. Your CPA can tell you which Alabama estimated payments apply.

When do Alabama contractors need workers' comp?

Employers that "regularly employ less than five (5) employees, full-time or part-time" aren't required to carry coverage, per the state's Workers' Compensation Division. That exemption doesn't apply to a business "constructing or assisting on-site in the construction of new single-family, detached residential dwellings." Corporate officers and LLC members count as employees. Officers can file to exclude themselves; check the division's forms. Read more in workers' compensation for contractors.

Local taxes in Alabama

• City and county sales and use taxes of 0.10% to 5%, filed with ALDOR, a third-party administrator or the locality.
• Municipal and county business licenses.
• Separate filings for self-administered city or county taxes. Ask each locality.

Neighboring state guides

Compare Mississippi, which charges a contractor's tax on larger commercial jobs, Georgia, Tennessee and Florida.