2. Assuming your weekly gross earnings are $525, calculate your withholding tax using the wage bracket method and the percentage method.
To calculate your withholding tax using the wage bracket method and the percentage method, we need to follow these steps:
Step 1: Determine your filing status
For this example, let's assume you are a single taxpayer.
Step 2: Find the appropriate IRS publication
To calculate the withholding tax, you'll need to refer to the IRS Publication 15, also called the Employer's Tax Guide. This publication provides the tax withholding tables to calculate the amount of tax to be withheld based on earnings and filing status.
Step 3: Select the correct wage bracket
Using the wage bracket method, locate your filing status (single) in the applicable column of the IRS Publication 15. Find the row that corresponds to your gross earnings range of $525. This will determine the amount of tax to be withheld.
Step 4: Determine tax withholding under the wage bracket method
Once you have located your filing status and earnings in the wage bracket table, look for the corresponding amount in the "Amount of Wages After Deductions" column. This will be the estimated tax withholding for the week.
Step 5: Calculate tax withholding under the percentage method
Using the percentage method, you'll need to carry out the following calculation steps:
1. Subtract the standard deduction from your gross earnings. For 2021, the standard deduction for a single taxpayer is $12,550. In this case, subtract $12,550 from $525. This leaves us with $512.50.
2. Identify the tax rate applicable to your income range. Refer to the IRS Publication 15 to find the tax rate. As of 2021, the tax rate for a single taxpayer earning between $0 and $9,950 is 10%. Therefore, 10% of $512.50 is $51.25.
Step 6: Compare the results
Compare the tax withholding amount obtained from the wage bracket method with the amount calculated using the percentage method. In this case, the wage bracket method will provide a specific amount based on the table, while the percentage method will give an estimated amount based on calculations.
Keep in mind that the actual withholding tax amount may also depend on factors such as additional allowances claimed on your W-4 form or any applicable state or local taxes. It's always a good idea to consult an accountant or refer to official IRS publications for the most accurate information.