A job change is exciting -- and it comes with a cluster of tax decisions that are easy to miss in the transition. Getting the 401(k) rollover wrong can trigger a significant unexpected tax bill. Failing to update withholding can leave you owing at filing time. Here is what to address and in what order.
The 401(k) Decision: Roll Over, Leave It, or Cash Out
When you leave a job, you generally have four options for your 401(k):
- Roll over to new employer's 401(k): Simple, keeps everything consolidated, maintains the tax-deferred status.
- Roll over to an IRA: More investment flexibility, potentially lower fees, still tax-deferred. This is often the best option for investment choice and control.
- Leave it in your old employer's plan: Permissible if the balance exceeds $7,000. Simpler short-term but creates account fragmentation over a career.
- Cash out: Almost always the worst option. The full amount is added to your taxable income for the year, plus a 10% early withdrawal penalty if you are under 59.5. On a $50,000 balance, this could mean $15,000+ in taxes and penalties.
For a tax-free rollover, use a direct rollover (trustee to trustee) -- the money never touches your hands. If the check is made out to you, your old plan must withhold 20% for taxes, and you have 60 days to deposit the full original amount (including the withheld 20% from other funds) into the new account to avoid taxation.
Updating Your W-4 at Your New Job
Your new employer starts fresh. Complete the W-4 accurately to reflect your expected annual income, filing status, and any tax credits. Common mistakes: not accounting for a mid-year income gap (you may have earned less this year than your new salary suggests), or not accounting for the income from your previous job already received this year.
The W-4's multiple jobs worksheet is important if you have income from multiple sources in the transition year. Underwithholding is common in job-change years and leads to a surprise balance due at filing.
Severance Pay
Severance is taxed as ordinary income -- just like your regular salary. It is subject to federal income tax withholding, Social Security, and Medicare taxes. Employers typically withhold at the supplemental wage rate (22% for amounts up to $1,000,000). If your severance pushes you into a higher bracket for the year, you may owe additional tax at filing.
If your severance is large and you have control over timing, check whether deferring any portion into the next calendar year is possible -- particularly if you expect lower income in the following year.
Signing Bonuses
Signing bonuses are also taxed as ordinary income, typically withheld at 22% (supplemental rate). Watch for clawback provisions: if you leave before a specified period (often one to two years), you may need to repay the bonus. If you repay a bonus that was taxed in a prior year, you may be able to claim a deduction or credit in the repayment year.
Health Insurance Gap
Between jobs, you may face a health coverage gap. COBRA continues your prior coverage at your expense (often expensive). Marketplace plans through healthcare.gov are available during a Special Enrollment Period triggered by loss of coverage. Health insurance premiums you pay are not deductible for employees (unlike the self-employed deduction), but if you are temporarily self-employed during the gap, premiums may be deductible.
Checking Your Year-End Tax Position
Job change years often have unusual income patterns -- a partial year at old salary, possibly a gap period, then a new salary. Run a mid-year tax estimate using our Income Tax Calculator once you have started your new job, to determine whether you need to make an estimated tax payment or adjust withholding to avoid a penalty.
Tax Issues That Come With a Job Change
Changing jobs creates a cluster of tax decisions that are easy to overlook when you're focused on the transition itself. Most of these need attention within a few weeks of starting a new position — or before you leave the old one.
Update Your W-4 Immediately
Your new employer uses the W-4 you submit to calculate federal income tax withholding. If you don't submit promptly, they may withhold at the default single rate — potentially under-withholding if you're married or over-withholding if you have significant deductions. If you're changing jobs mid-year, factor in your year-to-date earnings when completing your new W-4, since combined income across both employers determines your annual tax liability.
Your Old Employer's 401(k) — Your Options
You generally have three options with a former employer's 401(k): leave it in place (often allowed for balances over $5,000), roll it into your new employer's 401(k), or roll it into an IRA. A direct rollover (trustee to trustee) avoids withholding and tax consequences. Rolling to an IRA typically provides the most investment flexibility and control. Taking a distribution instead triggers immediate income tax and, if you're under 59½, a 10% early withdrawal penalty.
Beware of Gap-Year Withholding Issues
If there's a gap between jobs, you may under-withhold for the year unless you make a quarterly estimated tax payment for that period. Any income earned during the gap — severance, freelance work, investment income — may require quarterly payments to avoid the underpayment penalty. The Q2 2026 estimated tax deadline is June 16, 2026.
Two W-2s at Tax Time
You'll receive two W-2s — one from each employer — and both incomes are combined on your return. Also verify that total Social Security wages across both employers didn't exceed the 2026 wage base — if you overpaid Social Security tax across two jobs, you can claim the excess as a credit on your Form 1040.
Signing Bonus Tax Withholding
Signing bonuses are typically withheld at the supplemental wage rate (22%) or at your employer's payroll system's method. The withholding may not match your actual marginal rate — you'll reconcile at filing. If the bonus was large, consider making an estimated tax payment to avoid an underpayment penalty on the shortfall.
Use our income tax calculator to estimate your full-year liability with combined income from both jobs, and our refund calculator to see how your combined withholding stacks up.