I live in AL and the company is in AL.. They have a contract to do some work in MS, Is it correct for them to withhold AL & MS taxes?

If you work (or work and live) in two different states, you will file tax return in both the states.

Any income earned while present in a state must be reported to that state.

One state is your tax home. In the state that is not your tax home, report income you earned while in that state. If you have received only one W2 from your employer, then use simple arithmetic based on number of days spent in the state to figure our the income that you should report to this state.

In the state that is your tax home, report your worldwide income for full year. Also in this state claim credit for the taxes paid to the other state. Your U.S. Tax Return: Working or Living in Two or More states (http://taxipay.blogspot.com/2008/06/working-in-two-or-more-states.html)