Tax withholding for married couples with two incomes
Happily married people are often willing to share their joy with everyone. However, if you indicate “married” on the Employee’s Withholding Certificate or Form W-4, you may encounter unexpected “surprises.”
When you fill in “married,” have you provided your spouse’s income? If not, the company will assume you are the only breadwinner in your family and withold taxes according to married tax rates. As a result, you will have more money in hand each time you get paid, but you will owe a lot of taxes when filing your tax return at the end of the year.
The “standard” approach is to find the additional amount to be deducted from each paycheck based on both spouses’ incomes in the appendix of Form W-4, divide it by the remaining number of paychecks, and then fill it in line 4(c). However, some people face practical difficulties with this approach because the income limit for the lower-earning spouse in this appendix is $120,000. If it exceeds this number, this method will not work. The next option is for you to visit the IRS’ Tax Withholding Estimator Website to obtain the extra withholding amount.
However, after all the effort, if the situation changes next year, you have to start all over again. If the tax is withheld insufficiently, even if it is fully paid when filing taxes, there will still be an estimated tax penalty for insufficient tax withholding.
In fact, there is a simple and useful method: each spouse can withhold taxes as “Single or Married filing separately” but file a joint tax return. This approach is based on the fact that when two spouses’ wages are similar or both very high, there is not much difference in tax liability between filing jointly and separately. You can read this post of mine for analysis, or check the actual difference in my comparison worksheet in the tax return that I provide for every married couple.
This method is simple and easy to implement — just check one box — and it is a permanent solution, as the tax withholding will automatically adjust as your salary increases (or decreases).
Like other aspects of marriage, when each person takes care of their own affairs, the couple will thrive together.
PS: I would like to emphasize that I am suggesting you withhold taxes as married filing separately, not filing taxes separately. Unless there are special circumstances or you request it, filing a joint tax return is generally a good choice, at least in terms of saving filing fees.