Working as a Contractor in Alabama: Tax, Licensing and Getting Paid

Two things decide whether a job in Alabama makes you money: getting the license your work needs, and setting aside the right tax. Alabama licenses its contractors and taxes their profit, so both are worth getting right before you take work on.‍‌​​‌‌​​‌​​‌​​​‌​​​‌​‌​​​‌​​​‌​​‌‍

Each section below points to a tool that runs your exact numbers for Alabama.

Tax in Alabama

Alabama has a graduated state income tax that runs up to 5% at the top, on top of your federal taxes. Graduated means the rate climbs as your profit does, so a good year costs proportionally more. You owe federal income tax and self-employment tax as well, and you make estimated payments to both Alabama and the IRS through the year.

On sales tax, Alabama follows the usual rule for the trades: your labor is not taxed, and you pay sales tax on your materials when you buy them rather than charging it to the customer.

Work out what to hold back on the Tax Set-Aside Calculator, which runs the federal and self-employment numbers for Alabama.

Getting paid: liens and retainage

A mechanic's lien is the tool that actually gets a Alabama contractor paid, and in Alabama you generally have to record it within 4 months of your last day of furnishing labor or materials. Miss it and you lose the lien, so the dates matter.

Enforcing it has its own clock. 6 months, running from when the whole debt matured - not from the day you filed the lien and not from your last day on site (35-11-221). Nobody can force you to sue early: Alabama has no demand-to-commence provision. But two other clocks can be started on you. If the owner bonds the lien off onto a cash deposit or surety, you get 10 days from the court's certificate to challenge the amount or the surety (35-11-233(b)). And once you have been paid in full you must acknowledge satisfaction on the record - fail to do that within 30 days of a written demand and you owe the other side damages of at least $200 (35-11-231(b)). Work out your dates on the Lien Deadline tool, and if they are close, get an attorney to confirm them against the statute (Ala. Code 35-11-210, 35-11-215, 35-11-218, 35-11-221, 35-11-231, 35-11-233).

On money held back as retainage, here is where Alabama lands:

• Private work: 10% of the estimated amount of work properly done and the value of materials stored on site or suitably stored and insured off-site where the chapter does not reach residential homebuilders, improvements to residential property of 16 units or fewer, contracts of $10,000 or less, or any contract with state or local government.
• Public work: 5% of the estimated amount of work done and the value of materials stored on site or suitably stored and insured off-site. Nothing may be held at all.
• Release: Private: 60 days (the statute does not say whether these are calendar or business days) from the earlier of completion of the contractor's work as defined in its contract, or substantial completion of the project, in both cases with all necessary certificates of occupancy issued. Public: 35 days (the statute does not say whether these are calendar or business days) from the contractor's completion and the awarding authority's acceptance of all work required, once a certified voucher, lien release and proof of advertisement have been presented.
• Prompt pay: A prime must pay a subcontractor within 7 days of being paid unless the subcontract agrees otherwise. Late payment carries 1% a month; so does any amount held above the 10% cap.

Check the size of the job before you check the percentage. Alabama's cap does not reach every contract. The condition on it, in the statute's own terms: the chapter does not reach residential homebuilders, improvements to residential property of 16 units or fewer, contracts of $10,000 or less, or any contract with state or local government.

And the step-down is not the same thing as a right. Alabama cuts the rate to 0% when 50% completion has been accomplished. That drop is automatic once the condition is met, so it is money you are entitled to have back before the end of the job. No reinstatement provision. Money already held is not released early either; only new withholding stops.

Check the Retainage Calculator before you sign a contract that holds back more.

Free Alabama retainage letters

Three letters written for Alabama's rules, with the state's own release clock and its statutory citation already in them. Fill one in on screen and download it as a PDF or a Word file.

• Retainage Release Request (Alabama), for when the job is done and the money has not come back
• Retainage Overdue: Demand for Payment (Alabama), for when the release date has passed and nothing has arrived
• Retainage Held Above the Cap: Challenge Letter (Alabama), for when more is being held than the state appears to permit

Do you need a license in Alabama?

Alabama requires a state contractor license to take building work on. The threshold that triggers it: Commercial $100,000 or more; residential above $10,000; pools above $5,000; residential roofing above $2,500. Working unlicensed when your job needs a license is the expensive mistake here. The license comes from Alabama Licensing Board for General Contractors (commercial) / Home Builders Licensure Board (residential). Alabama accepts the NASCLA commercial exam, useful if you work across state lines.

Trade licenses for electrical, plumbing and HVAC are usually separate and often required even where a GC license is not. See what applies to your trade on the Contractor License Checker.

Building codes and permits

Alabama has no single statewide building code, so the edition you build to and whether you need a permit depend on your city or county. Do not assume the town next door adopted the same code or the same amendments.

• Homes: no mandatory statewide code; the Home Builders Licensure Board applies the 2015 IRC only as a yardstick for licensing complaints where no local code exists
• Electrical: none statewide for private work; the 2020 NEC binds only state-owned buildings, schools, hotels and theaters
• Energy: 2015 Alabama Residential Energy Code, a weakened 2015 IECC, for dwellings / ASHRAE 90.1-2013 for commercial
• Plumbing: 2021 IRC plumbing and gas chapters for residential / 2021 IPC for commercial, and only as a fallback where no local code exists

Alabama does not run one edition across the whole job, and the energy code is where it splits: 2015 Alabama Residential Energy Code, a weakened 2015 IECC, for dwellings / ASHRAE 90.1-2013 for commercial. That matters more than the number itself. If you work on houses, the residential edition is your book, and the single figure quoted in most adoption charts is the commercial one.

Alabama has no single building code binding every county. Four boards each own one family, and most only apply where a local jurisdiction has adopted nothing. The 2020 NEC adoption by the Division of Construction Management is real but its scope is state-owned buildings, schools, hotels and theaters, so it does not reach an ordinary house or an ordinary commercial job. Energy is the one genuinely mandatory statewide family, and Act 2024-443 also bars a local jurisdiction from setting a more stringent energy code. From 1 January 2027 residential builders must build to the state residential code once adopted, or to the applicable local code.

Source: Alabama Home Builders Licensure Board (hblb.alabama.gov) and Ala. Code §§34-14A-12, 34-14A-82; Division of Construction Management (dcm.alabama.gov/bldg_code.aspx) and Ala. Code §41-9-166; Ala. Admin. Code r. 305-2-4-.10 (residential energy); Ala. Admin. Code r. 720-X-1-.02 (plumbing and gas). We have not yet read this row against Alabama's own adopting authority, so confirm the edition locally before you rely on it.

Check a specific job on the permit tool.

Pay and workers' comp

The minimum wage in Alabama is the federal $7.25 an hour. Alabama has NO state minimum wage law. The $7.25 reaches you only through the federal FLSA, so it binds only FLSA-covered employment. Outside that coverage Alabama sets no floor at all. Whether it binds a particular job turns on whether the FLSA reaches that employment, which is the part most people miss. Check a rate on the minimum-wage tool.

Workers' comp rates in Alabama are not published as a single figure; they turn on your trade's class code and your payroll. Get a realistic range on the Workers' Comp Estimator, then get a real quote.

If a client will not pay

If a client will not pay, you can sue for up to $6,000 in Alabama's District Court, small claims. That covers most unpaid-invoice disputes for a small outfit; a bigger claim goes to regular civil court where you will probably want an attorney. Walk through whether filing is worth it on the Small Claims checker.

The clock runs the other way too: a client generally has 6 years to sue you over the work under a written contract in Alabama, with an absolute cutoff 7 years after the job is substantially complete. Work out your exposure on the Warranty & Claim Deadline tool.

Common questions

How much state income tax will I pay in Alabama?

Alabama has a graduated rate up to 5% state income tax on your profit, on top of federal income tax and self-employment tax. Use the Tax Set-Aside Calculator to see what to hold back.

Do I need a contractor's license in Alabama?

Yes. Alabama requires a state contractor license. The threshold: Commercial $100,000 or more; residential above $10,000; pools above $5,000; residential roofing above $2,500. It is issued by Alabama Licensing Board for General Contractors (commercial) / Home Builders Licensure Board (residential).

What is the small claims limit in Alabama?

You can sue for up to $6,000 in Alabama's District Court, small claims. The filing fee is typically $35 to $109. Larger claims go to regular civil court.

How long do I have to file a mechanic's lien in Alabama?

Generally 4 months from your last day of furnishing labor or materials. Miss it and you lose the lien. Work your own dates out on the Lien Deadline tool.

How much retainage can be held back in Alabama?

Private: 10% of the estimated amount of work properly done and the value of materials stored on site or suitably stored and insured off-site where the chapter does not reach residential homebuilders, improvements to residential property of 16 units or fewer, contracts of $10,000 or less, or any contract with state or local government. Public: 5% of the estimated amount of work done and the value of materials stored on site or suitably stored and insured off-site. Public, transportation: nothing may be held at all. Run your own figure on the Retainage Calculator.

Are there free Alabama contract and payment forms?

Yes. This page links 3 retainage letters written to Alabama's own release clock and carrying its statutory citation. They are free, there is no sign-up, and you fill one in on screen and download it as a PDF or a Word file.

What is the minimum wage in Alabama?

$7.25 an hour, the federal floor. Alabama does not set a higher rate of its own, so that floor reaches a worker through federal FLSA coverage rather than through state law. Check a specific job on the minimum-wage tool.

The honest bit

These are the 2026 rules for Alabama as they stood when this guide was written, and they change: legislatures move thresholds, deadlines and rates every year. Treat this as general guidance to point you in the right direction, not legal, tax or financial advice. Verify anything you rely on at the source (the IRS, the Alabama tax and licensing agencies, and your local building department) or with a professional. Where Alabama does something unusual, the detail is called out above rather than glossed over.

Related: Tax Set-Aside Calculator · Mechanic's Lien Deadline · Contractor License Checker · Small Claims checker · Working in Your State

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