I have an admin user and a standard user on Big Sur. I can log on to either when booting up but if I log out of one user the system will not accept the password for the other. I can sleep the machine and successfully enter the password for the current user on wake up.
I set up a test user and the result is the same for this. I have run First Aid in Disk Utility and run an SMC reset with no result.
This might be a Keychain issue but I am reluctant to reset the keychain because I have no idea what that might affect. Also each user has its own Keychain so it isn’t clear why all should be affected.
Updating to macOS 11.4 changed the problem. Everything works correctly when I use a wired keyboard but with a Bluetooth keyboard (I tried a couple) the system does not recognize certain keys (9 of them) when typing the password for switching users. This is bizarre!