If you’re preparing your own tax return, it’s common to see your estimated refund go down when you add a W-2 for your second job or your spouse’s job. Here’s what’s happening.
Default withholding is based on one job.
When you fill out your W-4 to set your withholding, the default assumption is that you’re a single earner with a single job. You pay more taxes when you have two jobs, because making more money means you’ll be in a higher tax bracket.
In order to pay the right amount of taxes, you need to let your employer know to withhold more by filling out the Two-Earners/Multiple Jobs Worksheet. It sounds simple, and it is, but if your HR person didn’t think to ask and you weren’t aware, it’s easy to miss.
Why does your employer need to know about other jobs?
You may think it’s none of your employer’s business how much your spouse makes, or you may not want them to know you have a second job. These are completely valid concerns, but it can affect your withholding.
Let’s say you have one job at $30,000 per year. In 2021, you’d pay $493 in federal income taxes.
Adding a second job at $30,000 per year (either your second job or your spouse’s job) would not double your taxes to $986. You’ve already used up your standard deduction and are moving into a higher tax bracket. Your actual income tax owed would be $3,793.
If your employers don’t know to withhold more because of the other job, they’ll each withhold around $493. That will leave you owing nearly $3,000 at tax time. In addition to ending up with a big tax bill, you could also have to pay penalties for not having enough withheld during the year.
If you tell your employers about the second job, they’ll each withhold about half of your expected $3,793 tax bill or about $1,897. You won’t get a refund or owe anything at tax time, because you got your withholding right.
Why does your refund go down when you enter W-2s in your tax software?
Now that you understand how withholding works with multiple jobs, it’s easy to see what’s happening with your refund. We’ll continue with the example from above.
When you enter your first W-2, the tax software sees you made $30,000 and had $1,897 withheld. At this point, that’s all the info it has. It thinks you made $30,000 and only owe $493 in taxes. It will show you a $1,404 refund.
When you enter your second W-2, the tax software now sees that you made $60,000 total and had $3,793 withheld. Now that it has all of your information, it knows you owe $3,793 in taxes. Your $1,404 refund goes to $0.
Even though it seems like you lost your refund, you didn’t actually lose anything. Your tax software only predicted a refund when it thought you earned less money. Once it had all of your income, it showed your correct refund based on your income.
Should you always expect to receive a refund on your federal tax return?
Many people get tax refunds for years in a row or even for their entire life. However, you should never expect a refund if you haven’t done the math for the current year. Small changes in your income, tax withholding, tax credits, filing status, or many other things can change what you owe at tax time.
Any changes can lower your tax refund or even mean that you owe money. For example, during 2021, the government sent part of the child tax credit in advance, so many people will see a lower refund or owe money compared to the prior year.
Should you change anything for next year?
It’s actually a good thing when you don’t get a big refund. A big refund means you gave the IRS an interest-free loan.
If you got a small refund or only owed a small amount, you probably have your withholding set correctly. If you either owed a lot or got a big refund, you may want to complete a new W-4 reflecting your current situation.
What if you don’t want to tell your employer about your second job?
If you don’t want to tell your employer about your second job, you have two options.
- Don’t enter a second job on your W-4. Use a tax calculator to calculate the total tax you’ll owe for the year and what each job will withhold if it’s your only job (see example above). In Step 4c of Form W-4, enter the amount of additional withholding that will cover the difference. Example: $3,793 total tax minus $493 withheld by Job 1 and $493 withheld by Job 2. You need an extra $2,807 in taxes withheld from one of your jobs or split between both jobs.
- If you don’t want one or both employers asking why you need extra taxes withheld, make estimated tax payments to cover the extra taxes. Example: Divide the $2,807 by four and make four payments of $701.75.
What if you didn’t get your withholding right and owe more than you can pay at tax time?
If you owe more taxes because you had your withholding at each job based on that job alone, pay as much as you can by the filing deadline. Paying more lowers your interest and penalties.