By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
When you are married filing jointly, only one spouse claims the children on Form W-4: the 2026 form says to complete Step 3 on the W-4 for one job only, ideally the highest paying one, and leave it blank on the other. But the child amounts in Step 3 only apply if your total household income will be $400,000 or less. For a two-earner household at $750,000 or more, the right amount to enter for the children on either W-4 is zero, because the child tax credit is fully phased out at that income.
That second sentence is the part most families miss. Claiming the kids on a W-4 at this income does not lower your tax. It only lowers your withholding, and the difference comes back as a balance due in April.
What Step 3 of the 2026 W-4 actually asks
The 2026 Form W-4 no longer asks for a “number of dependents” or allowances. Step 3 asks for a dollar amount of expected credits:
- 3(a): number of qualifying children under 17, times $2,200.
- 3(b): number of other dependents, times $500.
The instruction above both lines reads: “If your total income will be $200,000 or less ($400,000 or less if married filing jointly).” Above that income, the form does not have you enter the child and dependent amounts. The reason is the credit itself. For 2026 the child tax credit is $2,200 per child, but it shrinks by $50 for every $1,000 (or part of $1,000) of modified AGI over $400,000 on a joint return (IRS, Child Tax Credit; Schedule 8812). A couple with two children ($4,400 of credit) is phased out completely at $488,000 of MAGI ($400,000 + $4,400 / $50 x $1,000). The $400,000 threshold is not indexed for inflation, so it does not drift up as salaries do.
Can both parents claim the same child on their W-4s?
No. A child’s credit can be claimed once on the joint return, so it should be entered once across your W-4s. If both spouses enter $4,400, each employer withholds as if the family will receive the credit twice. Below $400,000 that is a small error. Above it, it stacks on top of a credit you were never going to get.
If you are separated or divorced, the parent who will claim the child on their own return is the one who may use Step 3, and only if their income is under the form’s limit.
Worked example: a $900,000 Bay Area household with two kids
Assumptions (illustrative, 2026): married filing jointly in California. One spouse is a biotech scientist with a $420,000 salary and $180,000 of RSUs vesting during the year. The other is a physician with a $300,000 W-2 salary. Two children, ages 4 and 7. Total wages $900,000. Standard deduction of $32,200 for simplicity (many families at this level itemize, which changes the numbers but not the logic).
| Item | Amount (2026) | How it is calculated |
|---|---|---|
| Taxable income | $867,800 | $900,000 minus $32,200 standard deduction |
| Federal income tax | about $243,250 | $206,583.50 on the first $768,700, plus 37% of the remaining $99,100 |
| Child tax credit | $0 | MAGI is far above the $488,000 full phase-out point for two children |
| Withholding lost by entering $4,400 in Step 3 | $4,400 | Step 3 cuts annual withholding dollar for dollar; one W-4 is enough to cause it |
| Gap on RSU withholding | about $25,400 | RSUs withheld at the 22% supplemental rate ($39,600), but taxed at 37% on $99,100 and 35% on $80,900 (about $64,980) |
| Additional Medicare Tax gap | $1,350 | Each employer withholds 0.9% only above $200,000 of its own wages ($400,000 + $100,000 = $500,000). The joint liability is 0.9% on wages above $250,000 ($650,000). 0.9% x $150,000. |
If this family enters the kids on a W-4 and does nothing about the RSUs, it can end up roughly $31,000 short at filing, and possibly owe an underpayment penalty. The dependents line is the smallest piece, but it is the easiest one to get right.
How to fill out both W-4s when you both earn high W-2 income
- Step 2 on both forms. With exactly two jobs, the form lets both spouses check the Step 2(c) box. The form says that option is generally more accurate than Step 2(b) when pay at the lower paying job is more than half of the pay at the higher paying job ($300,000 against a $420,000 salary here; the RSUs are withheld separately at the supplemental rate). If the gap is wider, the Multiple Jobs Worksheet (Step 2(b)) is the better choice, or use the IRS Tax Withholding Estimator.
- Step 3 on both forms: no child amounts. Above $400,000 of total income, there is no child tax credit to anticipate. (Step 3 can still hold other credits you expect, such as a foreign tax credit.)
- Step 4(c) on the higher paying job: extra withholding. This is where you fix the RSU and Medicare gaps. In the example, about $26,700 a year spread over 26 paychecks is roughly $1,030 per paycheck. Some equity plans also let you choose a higher withholding rate on vesting shares; check your plan documents.
- Re-run it when something changes. A new grant, a stock price move, a bonus or a spouse changing jobs all change the gap.
Pre-tax benefits are already handled. A dependent care FSA (up to $7,500 per household for 2026, if your employer’s plan adopted the higher limit), pre-tax 401(k) deferrals and pre-tax health premiums reduce your W-2 wages before withholding is calculated, so they do not go in Step 3 or Step 4(b).
Underpayment penalty: the 110% rule
Federal withholding is generally treated as paid evenly across the year, which is why raising withholding in the fall can still cover earlier quarters (Form 2210 instructions). To avoid the penalty, total withholding and estimated payments typically need to reach the smaller of 90% of this year’s tax or 100% of last year’s. If last year’s AGI was over $150,000, the prior-year test becomes 110%. Nearly every family reading this is under the 110% rule, so a year with a large RSU vest or a jump in salary is the year to check.
California and Washington: what the federal W-4 does not cover
California. The federal W-4 does not set your state withholding. California uses its own Form DE 4 for state income tax withholding (EDD). At this income, California taxable income sits in the 10.3% bracket, which starts at $742,958 for joint filers, and 11.3% applies above $891,542 (2025 schedules; 2026 schedules are not yet published), there is no lower rate for capital gains, and a 1% Behavioral Health Services Tax is added on taxable income over $1,000,000. The 13.3% top rate applies only once joint taxable income passes $1,485,906, where the 12.3% bracket starts. SDI is also withheld at 1.3% of all wages for 2026, with no cap. Review the DE 4 at the same time as the W-4, because RSU vests are a common source of a California balance due as well.
Washington. There is no state income tax on wages today, so there is no state form to match. Two things to watch: Washington’s capital gains tax (7% on long-term gains above the annual standard deduction, 9.9% on the portion of taxable gains over $1,000,000) applies when you sell vested shares held more than a year, and a new 9.9% income tax on AGI over $1,000,000 starts January 1, 2028 (WA DOR). Households near that line may need to plan payments for it.
Common mistakes we see at this income
- Both spouses entering the children, doubling a credit the family does not receive.
- Treating the W-4 as a once-only form filled out at hiring, years before the first large RSU grant.
- Assuming 22% RSU withholding equals the tax owed. At the 35% and 37% brackets it usually does not.
- Updating the federal W-4 and forgetting the California DE 4.
Write down how you decided
Withholding is a small decision, but the reasoning behind it is worth a short note in your family records: which spouse’s W-4 carries the extra withholding, why, and when you last checked it. If one of you handles it and the other does not, the note is what lets the other spouse, or a grown child years later, follow your thinking instead of starting over. Conversations fade. Documentation compounds.
Frequently asked questions
Should I put 2 dependents on my W-4 if we earn over $400,000?
No, if you file jointly. The 2026 W-4 tells you to complete Step 3 only if total income will be $400,000 or less. Above that, the child tax credit starts shrinking by $50 per $1,000 of income, and with two children it is gone at $488,000. Entering $4,400 would lower withholding for a credit you will not receive.
Which spouse should claim the dependents on the W-4?
The form says to complete Steps 3 through 4(b) on one W-4 only, and that withholding is most accurate when it is the highest paying job. The other spouse leaves those steps blank. At household income above $400,000, neither spouse should enter child amounts in Step 3.
Does the dependent care FSA go on the W-4?
No. Dependent care FSA contributions come out of pay before withholding is calculated, so they already reduce the wages your employer withholds on. Entering them again in Step 4(b) would count them twice. The 2026 household limit is $7,500, if your employer’s plan adopted it.
Next step
Pull your last pay stubs and your RSU vest schedule, then run both jobs through the IRS estimator together. If the gap is large or you want someone to own it each year, our tax management work covers withholding alongside employee benefits and equity compensation. Related reading: filling out a W-4 with one dependent, when one parent stays home, and family governance for documenting decisions like this one.
This article is general education, not individual tax advice. The right withholding setup depends on your family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Tax Management for high-income W-2 families at Bright Advisers.
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