The tax filing season is underway, and people want to how to file returns, maximize their tax refunds, and minimize delays. Some people wonder why their refund went down when they added another W-2.
Form W-2, Wage and Tax Statement, records an employee’s wages and the amount of taxes withheld at the end of the year. An employer is required to send this document to each employee and the IRS. Under the U.S. pay-as-you-go tax system, employers paying wages are required to withhold tax from employees’ paychecks and send the money to the IRS.
What if you have multiple W-2s?
How are tax refunds calculated?
Your tax refund is based on several factors, including your income, allowances, and taxes withheld. Many people add one W-2 to their tax software and are happy to see a big tax refund, but when they enter another W-2, the tax refund falls drastically. Some wonder if the IRS is penalizing them for having multiple W-2s or if there's been a mistake in the calculation.
Why do refunds drop after an additional W-2 is added?
Higher taxes with more W-2s makes sense, however: additional W-2s will boost your income, and standard deductions are allowed only once. So, when you add your first W-2, the tax calculator automatically lowers your taxable income, resulting in a higher refund. However, for the second W-2, all of the additional income becomes taxable.
With more income, you may have been moved into a higher tax bracket as well, increasing your taxation and reducing your refund. Unfortunately, the figure isn't accurate until all W-2s have been entered.
How should you report multiple W-2s?
When you file your tax return, add the amounts from all W-2s on Form 1040 (except if you receive duplicate W-2s from the same employer—in that case, enter only one of them). Also, if you receive part of your salary in cash and your employer doesn't send you a W-2 for that, you're still required to report the income.