Landing your first job is a big milestone. There’s a new routine, new coworkers, and that first paycheck. Then, sooner or later, comes something a little less exciting: your first tax return.
If you’re not sure what to expect, you’re not alone. To help, we sat down with our Tax Department here at Prosper CPAs and asked them to walk through the basics, from what’s coming out of your paycheck to what happens when it’s time to file. Here’s what they said.
Common misunderstandings
First-time filers tend to trip over the same few ideas. Clearing them up early makes everything else easier.
A refund isn’t free money. It can feel like a bonus, but it’s really your own money that was over-withheld during the year.
Earning a little still matters. Many people think they don’t need to file because they didn’t earn much. Even if you aren’t required to file, you may need to file to get back taxes that were withheld from your paychecks.
Dependent status needs coordinating. If your parents can still claim you as a dependent, you need to indicate that on your own return. You and your parents should coordinate before anyone files.
Side gig income counts. Whether it’s Door Dash, babysitting, reselling, or content creation, freelance and side gig income is taxable, and no taxes are withheld from it.
A higher bracket doesn’t tax everything at the higher rate. Moving into a higher tax bracket only means the portion of your income above the threshold is taxed at that rate, not all of it.
What is withholding?
In plain English, withholding is your employer taking money out of each paycheck and sending it to the IRS (and your state) on your behalf. Think of it as making payments toward your tax bill as you go.
How much is withheld is based on the Form W-4 you fill out when you start a job, and you can update it anytime. When you file your return, you compare what was withheld against what you actually owe.
Why is my paycheck smaller than my salary?
It’s one of the first surprises of a new job. Your gross pay is what you earned before anything is taken out. Your net pay, or take-home pay, is what actually lands in your bank account. The difference usually comes from items like these on your pay stub:
Federal income tax withholding
State and sometimes local income tax, depending on where you live and work
Social Security tax (6.2%) and Medicare tax (1.45%), often shown together as “FICA”
Benefits you signed up for, such as health, dental, or vision insurance
Retirement contributions, such as a 401(k)
What documents to expect?
As tax season approaches, you’ll start receiving forms that summarize your year. Depending on your situation, these may include:
Form W-2 from each employer, due by January 31. It shows your wages and the taxes withheld.
Form 1099-NEC or 1099-K if you did freelance, gig, or app-based work.
Form 1099-INT if you earned interest from a bank account.
Form 1098-T from your college if you paid tuition.
Form 1098-E if you paid student loan interest.
If you had a job last year, keep an eye on both your mail and your email, since many employers post W-2s online. If you haven’t received a W-2 by mid-February, contact your employer.
Your options for filing
Once your documents are in hand, there are a few general ways to file:
Tax software (online or desktop). Many have free versions for simple returns, but watch for upsells.
IRS Free File. Free brand-name software available through IRS.gov for people under an income limit.
VITA (Volunteer Income Tax Assistance). Free in-person help from IRS-certified volunteers for people with low to moderate income. Many sites are at libraries, community centers, and colleges.
A tax professional. This costs more, but it’s worth it for more complex situations.
Whichever route you choose, make sure you also file a state return if your state has an income tax.
Refund or Balance Due?
Whether you get a refund or owe money all comes down to one question: was the amount withheld during the year more or less than your actual tax? If more was withheld than you owe, you get a refund. If less was withheld than you owe, you have a balance due.
Common reasons people owe include side gig or freelance income with nothing withheld, working two jobs at once, investment income, or a W-4 that wasn’t filled out correctly.
Common reasons for a refund include lower income for the year, such as only working part of the year, or qualifying for credits like education credits.
When to talk to a professional
Plenty of first-time filers handle things on their own, but there are times when it may make sense to talk to a professional:
You have freelance, side gig, or self-employment income
You worked in more than one state, or moved during the year
You’re not sure whether your parents can claim you
You received a letter from the IRS or your state
You owe a large amount and aren’t sure why, or you need to set up a payment plan
You have investment income, crypto, or stock sales
You earned tips or overtime (there are new temporary deductions for these, and it’s worth making sure you get them)
You just want peace of mind that it’s done correctly
If your income/financial situation changes significantly and you want to be proactive about tax planning (or, if you haven't had any changes but still want to better understand what you have going on)
one last thing: the deadline
The filing deadline is generally April 15. If you’re not ready by then, you can file an extension. Just remember that an extension gives you more time to file, not more time to pay. It is a common misconception to think tax extensions are a bigger deal than they actually are. They are simple to file and they help take the pressure off if you aren't ready to spend the time needed compiling your documents. It is worthwhile to check in on any unpaid tax liability, though.
Your first tax return can feel like a lot, but once you understand the basics, it gets much more manageable. Welcome to the working world!