How to fill out a W-4 for a job when you're also self-employed, if your self-employed income puts you in a different tax bracket?

Question

I've been self-employed for a while, and am now starting a second job with an employer. I'm a bit confused as to how I should complete the W-4 - I just want to make sure I'm paying the correct amount of taxes (both income tax and self-employment tax).

For reference: I live in Texas, United States

It's my understanding that I don't have to add my estimated self-employment income to my W-4 unless I want my new job to also withhold my self-employment taxes (please correct me if I'm wrong). But here's my issue/confusion:

Without my self-employment income, my new job will put me in the 12% tax bracket. But, if I add my projected self-employment income, that will put me in the 22% tax bracket.

I would prefer for my job to withhold federal etc. income tax, and I continue to pay my quarterly estimated self-employment taxes. So I'm leaning towards not putting my self-employment income on my W-4.

BUT if I jump up to the 22% tax-bracket (because of my added self-employment income), and my job is only withholding 12% of my paychecks, then won't I owe a bunch of taxes at the end of the year?

How should I fill out my W-4 so that the appropriate amount of tax is being taken? I also don't want them to take TOO MUCH (more than usual) and leave me with baby paychecks.

I hope this is clear enough - I'm very confused about this and don't want this to be a big problem come tax time next year. Thanks for your help!

Answer 1

To avoid late-payment fees in the US, you will need to estimate what your taxes are likely to be, then either

(1) Tell your employer to increase withholding enough to cover what you think your actual taxes will be (just as you could if you were expecting significant income from investments or other sources and wanted that mostly covered by withholding to minimize how much you had to send with the tax forms), or

(2) File quarterly estimated-taxes forms and payments with the IRS yourself in lieu of withholding (which is what you'd do if you didn't have salary income), or

(3) Some combination of the two.

Your employer can't do this calculation for you since they don't know what your other income will be. But the worksheets for estimated tax will give you some idea of how much you will owe, and you can figure out from that how much you want withheld per paycheck and/or how much you want to make a quarterly payment of.

REMEMBER THAT TAX BRACKETS ARE INCREMENTAL. The portion that would have been taxed at 12% is still taxed at 12%. Only the amount which exceeds that range gets taxed at a higher rate. Ditto for subsequent brackets. You won't owe 22% on your entire earnings.

Answer 2

Your question is somewhat confusing. It doesn't matter how you pay your estimated taxes, you still need to pay them throughout the year. So if your employer doesn't withhold enough to cover your tax liability - you still need to pay that amount.

Using salary withholding makes things more convenient - you don't need to deal with making timely estimated payments, dealing with unequal income distribution throughout the year, or deal with the additional paperwork.

Seems like your SE income is significantly more than your salary. That means that if you don't have enough withholding and estimate payments you'll end up with a significant tax bill next year + underpayment penalties. To cover this you'll probably need to adjust your W4 to withhold larger amounts from your salary, and receive "baby paychecks". But, you'll have your SE income as well. So your total net income is the same, no matter how you slice it to pay your estimated tax payments.