Tax withholding for professionals, CPA help please!

[Paul Passafiume]

Hello folks, without getting in the weeds, I was hoping a CPA or tax lawyer can help out. 

I make about 360k on a 1099, 30k in net real estate income, and 86k on a W2 which has taxes withdrawn. I max out my SEP IRA, 401K, and HSA to reduce my tax burden. I get health insurance through my W2 and last year I itemized about 27k in different expenses. I have maybe 4k in other/interest income. My wife has decided to get a very part time job. She will make about 5k this year, maybe 12k next year (she is a stay at home mother full time, much more difficult work).

I am kind of confused on how to fill out her W-4. Her employer will take out taxes but if we are married filing joint, would 2 be a safe number to put?  I did the worksheet and it was a bit higher but I think we will put 2. We aren't desperate for the money and I just want to make sure we will not owe taxes on her earnings in April. 

Without going into detail, how does the IRS know to tax her much higher than just a regular person making so little money which would be below the poverty line alone?  Is it even an option to only withhold 1 on her W4 even though we are MFJ?  I should add I of course realize the idea is to withhold less so you can get your money faster but a nice refund on her earnings will help discipline us to save for a nice vacation for Spring Break!

Thanks!

[Eamonn McElroy]

@Paul Passafiume

"I did the worksheet and it was a bit higher but I think we will put 2."

Reading the instructions and filling out the worksheets will tell you exactly what to put, and is a much better answer than a general answer from a CPA or EA on these message boards.

"Without going into detail, how does the IRS know to tax her much higher than just a regular person making so little money which would be below the poverty line alone? Is it even an option to only withhold 1 on her W4 even though we are MFJ?"

They don't "know" and technically you aren't "taxed" during the year.  They withhold at the rates you instruct them to withhold, nothing more, nothing less.  You can put whatever you want on the W-4, however if you under withhold during the year you may have exposure to under withholding penalties.  You calculate your tax liability with your return and will either get a refund or pay in to reconcile your tax liability with your withholding.