How Do Taxes Work If You Have Two Jobs?
Understand how having two jobs impacts your overall tax liability. Learn key strategies for accurate withholding to prevent surprises at tax time.
Many individuals work more than one job to supplement income or pursue passions. While each employer withholds taxes based on the income they pay, the Internal Revenue Service (IRS) views all of an individual’s income as combined for the year. This aggregation introduces complexities in tax calculations compared to having a single employer. Understanding this system and adjusting tax withholding is important to avoid unexpected tax obligations.
How Income from Multiple Jobs is Taxed
The U.S. operates under a progressive tax system, meaning higher income levels face higher tax rates. When an individual has income from multiple jobs, the tax system aggregates all taxable earnings from all sources to determine the total tax liability for the year. This combined income is then subject to the progressive tax bracket structure. Even if income from each job is modest, the combined income can push an individual into a higher tax bracket than they would be in with just one job.
Standard deductions and various tax credits apply to this total aggregated income, not on a per-job basis. For instance, the standard deduction, which reduces taxable income, is a single amount claimed on the overall tax return. Since each employer calculates withholding as if their job is the only income source, the total amount withheld across multiple jobs might not cover the higher tax liability from combined income.
Managing Your Tax Withholding
Form W-4, Employee’s Withholding Certificate, informs employers how much federal income tax to withhold. For individuals with multiple jobs, accurately completing the W-4 ensures enough tax is withheld to cover the total tax liability. One effective method is to use the IRS Tax Withholding Estimator tool on the IRS website. This tool helps determine the most accurate withholding amount by considering all income sources, especially for those with fluctuating income or self-employment earnings.
Alternatively, use the “Multiple Jobs Worksheet” in the Form W-4 instructions. This worksheet helps calculate an additional amount of tax to be withheld, typically entered on line 4(c) of the W-4 for one job, preferably the highest-paying one. A simpler option for two jobs with similar pay is to check the box in Step 2(c) on the W-4 for both jobs. This instructs each employer to withhold tax at a higher rate, splitting the standard deduction and tax brackets. If chosen for jobs with significantly different pay, this might result in over-withholding. The goal is to align total tax withheld with anticipated total tax liability, minimizing the chance of owing a large amount or receiving an excessively large refund.
Understanding Common Withholding Scenarios
Tax withholding for multiple jobs directly impacts the financial outcome at tax time. If not enough tax is withheld, an individual may owe additional taxes and face an underpayment penalty. The IRS imposes this penalty if tax paid through withholding and estimated payments is less than 90% of the current year’s tax liability or 100% of the prior year’s tax liability, whichever is smaller. For high-income earners (adjusted gross income over $150,000), this threshold increases to 110% of the prior year’s tax. The penalty amount is calculated based on the underpayment amount and the period it remained unpaid.
Conversely, too much tax withheld results in a refund. While a refund may feel like a bonus, it means the taxpayer provided an interest-free loan to the government. This money could have been used for savings, investments, or to reduce debt, potentially earning interest or returns. Many taxpayers intentionally over-withhold to avoid owing money, viewing the refund as forced savings. However, optimizing withholding for a smaller refund or small balance due provides more immediate access to earnings. Under-withholding is common for individuals with multiple jobs who do not adjust their W-4 forms or account for combined income.
Reviewing Your Tax Situation
Periodically reviewing your tax situation throughout the year is important, especially when managing income from multiple jobs. Taxpayers should check their pay stubs regularly to monitor the cumulative amount of tax withheld. This practice helps in identifying potential under- or over-withholding early on.
It is recommended to use the IRS Tax Withholding Estimator tool at least once annually, or whenever significant life events occur. Changes such as marriage, the addition of dependents, or a change in income from any job warrant a re-evaluation of withholding. Proactive adjustments to W-4 forms based on these reviews can help prevent surprises when tax returns are filed. By staying informed and making timely adjustments, individuals can ensure their withholding accurately reflects their tax liability, leading to a smoother tax season.