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My wife and I live in the SF bay area. My gross income is $320,000 and my wife's is $38,000. My wife is employed as a contractor though and gets a 1099 instead of W-2. No taxes are withheld from her paycheck. I'm trying to figure out how to fill my W-4 so that taxes can be withheld for both of us. We plan to file jointly for 2016.

If I follow the W-4 worksheet instructions I end up with a $A additional withholding per paycheck. So I'm thinking of putting an additional withholding amount of $A + $B where $B is (my wife's estimated annual tax divided by no. of my pay periods). To estimate my wife's annual taxes I am adding both our gross incomes and subtracting pre-tax investments (401(k) etc.) to determine a tax bracket. Does that sound like the right thing to do?

Also how can we withhold state taxes for my wife?

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Littleadv is incorrect because receiving a 1099 means she will be taxed self-employment tax on top of federal income taxes. Your employer will automatically withhold 7.65% of payroll taxes as they pay you each paycheck and then they'll automatically pay the other half of your payroll tax (an additional 7.65%) to bring it to a total of 15.3%. In other words, because your wife is technically self employed, she will owe both sides of payroll tax which is 15.3% of $38k = $5,800 on TOP of your federal income tax (which is the only thing the W-4 is instructing them about what amount to withhold).

The huge advantage to a 1099, however, is that she's essentially self-employed which means ALL of the things she needs to run her business are deductible expenses. This includes her car, computer, home office, supplies, sometimes phone, gas, maintenance, travel expenses, sometimes entertainment, etc - which can easily bring her "income" down from $38k to lets say $23k, reducing both her federal income tax AND self-employment tax to apply to $15k less (saving lets say 50% of $15k = $7.5k with federal and self employment because your income is so high).

She is actually supposed to pay quarterly taxes to make up for all of this. The easy way to do this is each quarter plug YOUR total salary + bonus and the tax YOU have paid so far (check your paystubs) into TurboTax along with her income so far and all of her expenses. This will give you how much tax you can expect to have left to owe so far--this would be your first quarter. When you calculate your other quarters, do it the exact same way and just subtract what you've already paid so far that year from your total tax liability.

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    While you are correct regarding self-employment taxes, you may be seriously overstating how much can be deducted. – D Stanley Mar 2 '17 at 17:11
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With your income so high, your marginal tax rate should be pretty easy to determine. You are very likely in the 33% tax bracket (married filing jointly income range of $231,450 to $413,350), so your wife's additional income will effectively be taxed at 33% plus 15% for self-employment taxes. Rounding to 50% means you need to withhold $19,000 over the year (or slightly less depending on what business expenses you can deduct).

You could use a similar calculation for CA state taxes.

You can either just add this gross additional amount to your withholdings, or make an estimated tax payment every quarter. Any difference will be made up when you file your 2017 taxes. So long as you withhold 100% of your total tax liability from last year, you should not have any underpayment penalties.

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When you enter your expected gross income into the worksheet - just enter $360000 and leave everything else as is. That should give you the right numbers.

Same for State (form DE-4).

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