Changing Jobs? Tax Implications and Tax Forms for a New Job

Starting a new job

Whether you get an exciting new career opportunity or you decide that you need a change of pace, you're likely to switch jobs at some point in your career. In fact, according to data from the Bureau of Labor Statistics, Americans held an average of 12.3 jobs from ages 18 to 52.

When you change jobs, it's important to understand all of the tax forms for a new job and how leaving one role and starting another will affect your overall tax situation.

Separation pay

Typically, when you leave a job, you may receive severance pay or accrued vacation time. These payments are taxable income, which means they're subject to the same federal (and possibly state) income taxes, Social Security taxes, and Medicare taxes as other wages.

Another thing to keep in mind is that the IRS classifies severance pay as "supplemental wages," which have their own tax rules. Your former employer is required to withhold 22% of your severance pay and send it to the IRS.

The good news is: You may be able to get some of that federal income tax withholding back in the form of a tax refund. When you file your tax return for the year, you'll reconcile the amount you paid through withholding and estimated payments with the amount you actually owe for the year. If you paid too much tax, you'll get a larger refund.

Unemployment compensation

Unemployment benefits are typically taxable income. How much you owe on unemployment payments depends on your tax bracket and other deductions and credits you may be able to claim.

You have the option to have federal income taxes withheld from your unemployment income, but withholding isn't automatic. You need to complete Form W-4V and submit it to your state unemployment office to ask that they withhold taxes. If you choose to do so, they'll automatically withhold at a rate of 10%. But depending on your situation, that may not be enough.

For unemployment benefits received in 2020, the American Rescue Plan Act gives some people with unemployment income a break on taxes. The law allows people to exclude the first $10,200 of benefits (up to $10,200 per spouse if filing jointly and both received unemployment benefits) from taxable income if the household has an adjusted gross income less than $150,000.

This $10,200 exclusion is currently only available for benefits received in 2020, and any benefits more than that amount will be taxable. If you've already filed your 2020 tax return, you don't need to file an amended tax return. The IRS plans to automatically process refunds for taxpayers who filed their returns before the new legislation passed.

Current law makes these benefits taxable once again after 2020.

Fill out tax forms for a new job to update your withholding

Most employees have too much federal income tax withheld from their paychecks. That's why about 100 million people receive big tax refunds every year.

When you start a new job, your new employer will ask you to complete a Form W-4, which tells them how to calculate the federal withholding tax for your paycheck. Filling out this form might seem like another routine part of onboarding but take some time to go over the instructions. The information you provide on that form determines how much tax will be withheld from your paycheck.

If you need help figuring out how to complete Form W-4, check out the IRS Tax Withholding Estimator. When you provide some basic information about yourself, your income, tax deductions, and credits, the calculator will help you fill out Form W-4.

Note: Your withholding may jump if you switch jobs after earning more than the Social Security wage base for the year ($147,000 in 2022, $142,800 in 2021). That's because when you reach that point, your employer stops withholding Social Security taxes. But when you change jobs, your new employer must withhold the tax on the amount they pay you up to the wage base, even though you don't really owe more. On the bright side, any excess Social Security tax withheld will be refunded when you file your tax return for the year.

Moving for a job may have tax implications

Moving for a new job may entail selling your primary residence, which can have capital gains tax implications. Normally, tax law allows you to avoid capital gains tax on the first $250,000 of gain on the sale of your home ($500,000 for married couples) as long as you've lived there for at least two out of the past five years.

What happens if you have to sell your home and move within that two-year time frame for a new job? As long as the sale results from a job change and your new work location is at least 50 miles farther from the home than your old work location, the IRS allows you to take a partial exclusion. This partial exclusion is based on the amount of time you used the house as your primary residence.

• For example, if you owned and lived in the home for just one year, you'd get half the exclusion available to people who meet the two-year test.
• That doesn't mean half the profit is tax-free; it means all of the profit up to $125,000 ($250,000 if married filing jointly) would be tax-free.

Currently, moving expenses are only deductible for tax years prior to 2018, unless you're an active member of the U.S. Armed Forces moving due to a permanent change of station. Before 2018, if changing jobs required you to relocate, you could deduct moving costs and the expense of traveling to your new location as long as you met certain time and distance tests. You may still be able to deduct moving expenses on amended tax returns for 2018 and earlier.

Keep in mind, if you worked and earned income in more than one state, you may need to file multiple state income tax returns in addition to your federal return.

Don't forget about your old 401(k) retirement account

Changing jobs can also affect your retirement savings. Often, employees may choose to cash out their 401(k) balance, but it usually results in a big tax bill.

At any age, cashing out your 401(k) means paying taxes on the amount withdrawn. If you're under the age of 59½, you may also come across an early withdrawal penalty. Unless you need the funds to cover your living expenses, consider the following alternatives:

• Leave your money where it is. As long as you have at least $5,000 in the account, most companies allow you to leave your money in your former employer's plan, where it'll continue to grow. But you won't be able to add any more money to the account. If you have less than $5,000 in your account, the plan administrator may automatically send the money to you or to an IRA for you.
• Transfer your old 401(k) balance into a Rollover IRA. A Rollover IRA is a retirement account that allows you to move money from an employer-sponsored retirement plan into an IRA. You can open an IRA with a bank or brokerage firm and may have more investment options than what was available in your old 401(k) plan.
• Transfer your old 401(k) balance into your new employer's plan. Some — but not all — employers will accept a rollover from a previous employer's plan. Having all of your 401(k) funds in one place makes it easier to manage your retirement savings, and you'll be able to continue growing your money on a tax-deferred basis.

If part of your old 401(k) is invested in the company's stock, be sure to check out the special rules for "net unrealized appreciation." It can save you a lot of money.

Job-hunting expenses are no longer deductible

Like moving expenses, job-hunting expenses are only deductible for tax years prior to 2018 and only if you itemized deductions on Schedule A.

For tax years before 2018, job-hunting expenses were a miscellaneous itemized deduction, and you only received a tax benefit if your total miscellaneous itemized expenses exceeded 2% of your adjusted gross income. Beginning in 2018, these miscellaneous items are no longer deductible.

But for tax years prior to 2018, you may still be able to claim these expenses on an amended return. To qualify, the job you're seeking must be in the same line of work. Eligible expenses include the cost to print and mail your resume, fees paid to an employment or placement agency, and travel costs associated with the job search.

Be on the lookout for multiple W-2s and other tax forms

Around the end of January in the year following your job change, you should start receiving all your tax forms, including your final W-2 form from your former employer. Your old employer isn't required to send it to you right away but must provide it by January 31 — the same deadline that applies if you were still working there.

You may also receive:

• Form 1099-G if you received unemployment compensation
• Form 1099-S if you sold your home
• Form 1099-R if you cashed out or rolled over your old retirement account
• Form 1099-NEC if you performed any freelance work

Get into the habit of saving all the tax forms, receipts for deductible expenses, and other important tax records in one place so you'll have everything you need to prepare your tax return. You can save them in a physical folder or scan and save them digitally — whichever method works best for you.

Changing jobs can be a huge transition that affects several areas of your life, including your taxes.

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