Here's my system:
1. Decide if you want to exactly break even at tax time or if you want to withhold the minimum you can get away with without a penalty.
In the former case, base your total withholding for the year on your estimated taxes owed. Figure out that number as best you can.
In the later case, base your total withholding for the year on the amount of tax you paid last year. I'm not a tax attorney, but as I understand it you don't have to pay a penalty, even if you owe money in April, as long as you withheld at least as much as your total tax for the previous last year.
2. Determine how to achieve that total amount of withholding. You can balance it between husband and wife however you want, e.g., 50-50 or proportionally to your paychecks.
To figure out the amount for your W-4:
1. Specify your actual filing status, with 0 allowances and 0 additional amount. I don't think the IRS cares what you put there, but with this method there's no reason not to set it to your actual filing status.
2. Turn in the W-4 and wait for one paycheck, to see the base amount that is withheld.
3. Submit a new W-4, still with 0 allowances, but with an additional amount that's just right to get you to the total withholding you want for the year.
You can skip Step 2 if you figure out the base withholding amount for your situation, using the same tables that your employer's payroll system uses. Otherwise, do Step 2 as it says.
I've used this system for years and always withheld exactly the amount I wanted.
One thing to be aware of: If the factors that determine your taxes change (salary, number of dependents, etc.), your withholding will not, so adjust it at that time.
