Most of the time, we need to talk about your tax liability, the net amount the IRS keeps after all payments, withholding, taxes, credits, and refunds. (For example, if your W-2 job has $10,000 of withholding, your wife's job has $2000 of withholding and you get a $2000 refund, your tax liability was $10,000.).
However, for purposes of the penalty for underpayment, the $1000 refers to a tax payment owed with your tax return to pay off your tax liability for the year. See below.
The tax system is pay-as-you-go, and estimated payments are always required by law. However, you might not be penalized for not making those estimated payments. You will not be penalized as long as you meet one of these three tests:
1. You owe less than $1000 additional payment when you file your return.
2. Your total payments into the system (via withholding or estimated payments) is at least 90% of your current year tax liability.
3. Your total payments into the system (via withholding or estimated payments) is at least 100% of your prior year tax liability (or 110% for higher earning taxpayers).
Yes you can increase your withholding on your W-2 job to cover the other taxes. The IRS doesn't care how the money comes in, as long as they get it.
