In BambooHR, we calculate federal taxes based on the wages an employee earns and the applicable tax rates. Here are the key points for calculating federal taxes:

• Wages: The Paycheck Wages column on the paystub displays the wages from which we calculate federal taxes.
• Tax Calculation: We derive the federal tax amount from an employee's total wages during the pay period. The "You Paid Taxes On:" section of the paystub reflects this.
• Tax Reporting: The updated paystub includes Paycheck Taxes and [Year] Taxes sections. These sections clearly show the total taxes we withheld for both the paycheck and the year.

Users with appropriate access levels, such as Full Admins (FA) or Payroll Admins (PA), can view and manage tax settings within BambooHR. Other users may need to request assistance from these admins to access or update tax-related information.

The IRS provides Publication 15-T to employers and outlines the federal income tax withholding methods. It includes guidelines on how employers should calculate federal income tax withholding for employees based on their wages and the information they provide on their Form W-4.

Key Points about Publication 15-T:

• It provides Percentage Method Tables for calculating federal income tax withholding, which are essential for automated payroll systems.
• Employers can use this publication to ensure they are withholding the correct amount of federal taxes from their employees' paychecks.
• The publication is crucial for verifying that employers apply the correct federal tax withholdings, especially if you have questions about why an employee's federal taxes seem high or low.

For more detailed information, you can access the publication directly here.

In payroll and federal income tax withholding, employers use the "percentage method," also known as the annualized calculation method, to figure out how much income tax to withhold from an employee's paycheck.

• How it works: This method estimates an employee's annual wages based on their current earnings and the number of pay periods in a year. We then apply the appropriate federal income tax rates (from IRS tables) to that estimated annual wage to determine the total annual tax. Finally, we divide this annual tax by the number of pay periods to arrive at the withholding amount for the current paycheck.
• Purpose: Employers often prefer this method for employees with fluctuating income, such as those who receive commissions or irregular bonuses. It ensures employers withhold the correct amount of taxes over the course of the year, preventing large under- or over-withholdings.

Possible reasons for a higher tax rate:

• Tax Calculation Based on Pay Period: We calculate taxes on an employee's taxable income for the specific pay period, not their annual income. If your employees receive a higher paycheck, we might push them into a higher tax bracket for that pay period, resulting in a higher tax rate. This is especially true when an employee receives a bonus. Occasionally, you may add bonuses to regular pay, significantly inflating the taxable income for that pay period. When we annualize income based on this inflated pay period, the system projects a much higher annual income. This leads to higher withholding for that single bonus paycheck, even if the employee's overall annual income doesn't truly place them in a higher bracket.
• New Year Tax Changes: At the start of a new year, wage bases reset for certain taxes. For example, the FUTA tax (Federal Unemployment Tax Act) restarts each calendar year, which can lead to higher taxes early in the year. Additionally, Social Security's wage base changes annually, which can also affect the tax rate.
• State-Specific Tax Regulations: If your employee is subject to state-specific taxes, like Maine's PFML (Paid Family and Medical Leave), rounding practices in tax calculations can create discrepancies. For instance, if we round employer and employee tax amounts differently, it can lead to unexpected differences in the amounts we withhold.
• Change in Payroll Provider and Withholding Method: When a company switches payroll providers (e.g., from a previous provider to BambooHR), and the new provider uses a different withholding method (such as the "percentage method" versus a "wage bracket method"), employees might see a noticeable change in their federal tax withholding. The previous provider's method might have resulted in lower or higher per-paycheck withholding, depending on its specific calculations and the employee's elected allowances. The new provider's method, potentially more precise or using different assumptions for annualizing income, could lead to a different withholding amount even if the employee's W-4 elections remain the same. This can often result in higher per-paycheck withholding with the new provider if the previous method under-withheld.

In summary, higher pay periods (especially due to bonuses), annual resets of certain taxes, state-specific regulations, and changes in payroll provider withholding methods can all contribute to a higher-than-expected tax rate for your employee.

Possible Reasons for a Lower Tax Rate

• Tax Rate Structure: Specific states have set tax rates for employees (EE) and employers (ER) contributions. For example, Maine's Paid Family and Medical Leave (ME-PFML) has a set tax rate of 0.5% for both employee and employer contributions. If an employee's gross wages do not accurately reflect this rate, it could lead to lower tax amounts withheld.
• Rounding Discrepancies: The system for tax calculations rounds the employee's tax amount up and the employer's tax amount down. This rounding can create discrepancies over time, leading to situations where the employee pays slightly more than the employer, resulting in a cumulative difference. For example, in one case, the employee paid 7 cents more than the employer over a quarter.
• Excess Wage Calculations: The tax accumulator may not immediately detect discrepancies because it re-runs payroll calculations without adjusting for previous rounding errors. This can mask the actual tax owed versus what we have collected.
• Adjustment Limitations: Currently, the employee tax type does not allow for adjustments. This means that if discrepancies occur, we may not automatically correct them. Enabling adjustments could reveal a more accurate distribution of taxes owed.
• Per-Paycheck Taxable Wages Resulting in $0 Withholding: An employee might receive $0 in Federal Withholding throughout the year if their per-paycheck taxable wages, after accounting for pre-tax deductions and their W-4 elections (e.g., claiming a high number of dependents or significant tax credits), consistently fall below the threshold for federal income tax withholding. This often happens with part-time employees, those with very low wages, or individuals who strategically adjust their W-4. While legally permissible if their annual tax liability genuinely is zero or very low, this can lead to a significant tax bill at the end of the year if their actual annual income exceeds the non-taxable threshold, or if they qualify for fewer credits than anticipated. The payroll system, using the chosen withholding method (e.g., percentage method), accurately calculates that, based on the individual pay period's income, no withholding is required.

In summary, rounding practices, tax rate structures, limitations in adjustment capabilities, and scenarios where per-paycheck wages are too low to trigger withholding can lead to a lower-than-expected tax rate for your employee, potentially resulting in an unexpected tax liability at year-end. We advise you to review payroll calculations and consider enabling adjustments to ensure accurate tax withholding.