This is a looooooong thread, but I seem to remember your wife saying she was setting aside some of her SE employment $ for taxes. That's important. If one doesn't pay enough in one's quarterly estimated payments the IRS penalizes you, so that $ needs to be planned for. It can be planned for by taking it off the top and budgeting net, or it can be built into the budget. But you do need to do it. Safe harbors for state income tax varies by state. They need to check for their state. Since this is the first year that she has significant income, his withholding will likely be equivalent to 2011 income tax liability which is a safe harbor for federal income tax. Starting in April of 2013, estimated tax payments should be made.The other item working in their favor for 2012 is that her income is starting late in the year. If any underpayment penalty (essentially interest) would be due, it would only be for part of the year.
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