Annualized Self-Employment Earnings

[Raspberry]

A prompt popped up as I was finishing my 2019 tax return:
"Underpayment Penalties". I owe $81 due to the penalty (my income greatly fluctuates, I am self-employed). 

What I don't understand is when I go to enter my "Annualized Self-Employment Earnings", the 01/01/2019 - 12/31/2019 period is auto filled, but it is NOT the correct amount. The amount auto filled is about $2,000 under my actual income for 2019; my net income does not match it.  Is this a bug or what have I missed here?

[MarilynG1]

You can adjust the Income and Expense amounts for your Estimated Taxes for Self-Employment.

Type '1040-es' in the Search area, then click on 'Jump to 1040-es'.

Say NO you don't want to Adjust your W-4.

Say YES you want to Adjust your Income or Deductions. 

Continue to screen that let's you enter amounts for Self-Employment Income/Expenses (screenshot). 

[terry-n]

I'm doing 2020 taxes in TurboTax Premier and running into the exact same issue. I could just override the full year amount in the worksheet, but I want to be sure that wouldn't be messing something up.

Did you ever figure it out, @Raspberry?

[terry-n]

I'm afraid @MarilynG1's answer doesn't address the question. The issue concerns the annualized income installment method of avoiding an underpayment penalty (Form 2210 Schedule AI) — specifically its self-employment tax component (Part II of that schedule) — not estimating tax for an upcoming year. Form 1040-ES isn't relevant.

[terry-n]

Okay, I think I've figured out what's going on by looking at the form behind that particular "EasyStep" (page of TurboTax's Q&A interface) and consulting the IRS's instructions for that form.

Bottom line up-front:

Check whether that strange uneditable value shown for the whole year is actually 92.35% of the value you expect it to be ("Business income or (loss)" on 1040 Schedule 1, or the total of the "Net profit or (loss)" lines from all your Sch. C's). If it is, then most likely TurboTax still has a bug. Just fill in the first three boxes as if the fourth value were what you expected it to be. That is, fill the first three boxes with what your "business income or loss" was/would-have-been-calculated-to-be at the end of each of the three partial years. If, however, the full year value is NOT 92.35% of what you expect it to be, then you probably have some other inconsistency going on. Make sure you're including in your figuring for the annualization periods the same set of income and expense streams that you earlier entered into TurboTax for the whole year—that you haven't forgotten any.

The details (as of March 15, 2020):
The numbers you put into the boxes for the first three periods go directly into TurboTax's "Annualized Self-Employment Tax Smart Worksheet" behind the scenes. Each of them is then multiplied by 92.35% and put into the "Net earnings from self-employment for the period" line (line 28, as of 2020) of the IRS's Form 2210 Schedule AI. According to the IRS's instructions for that line, that's generally what should go on that line. TurboTax pre-populates the fourth column of that line with 92.35% of your "business income or loss" from 1040 Sch. 1. TurboTax's intermediary "smart worksheet" I mentioned doesn't have a spot for the full year's value, though, and whomever coded that particular EasyStep appears to have linked the full year value displayed in the prompt directly to Sch. AI line 28 column 4. The number on that form should be divided by 92.35% before displaying it to the user (in order to make it comparable to the numbers the user is supposed to enter) but that isn't being done.

Hope this helps someone else (and that TurboTax puts the time into greatly improving the EasySteps for income annualization soon!)

[Charles61]

I think you nailed it.  I think Turbotax never bothered to fix the problem and never bothered to explain the process.  As a result I wasted days talking with various people at Turbotax, several of whom told me to put "zero" directly in the smarty worksheet, one of whom hung up on me without a word after two or three minutes, a tax advisor at Turbotax to told me he wasn't familiar with the program and couldn't help, another tax advisor who said he "wasn't going to talk to an engineer" and hung up on me.  It wasn't until I talked to Greg this morning that I got any help on this issue.  He found your post and sent me a link. 

Thank you for identifying this problem A MONTH AGO.  Unfortunately, Turbotax apparently doesn't care.

[GoinBroke]

Thanks, this was very helpful.  Here we are, two and a half years later, and the problem still exists in TT H&B 2021 (extended filer).  I have had success getting TT to fix previous errors I have found, so I'll give this a go as well.  BTW, the AGI input is also incorrect as they want you to account for (subtract) half the self-employment tax that was already adjusted under self-employment income as you clarified.  

[T2T2T2]

Looks as though this is still an issue with the 2022 tax year (and I'm not even close to that 92.X% -- the pre-calculated number for the 4th period is about 71% of what the year's gross total should be. Maybe the number already has the QBI baked in (see below) -- if so, should the other periods also have that percentage baked in?). They could make this a little easier with a little explanation!

In a related question, they later ask for QBI numbers (Qualified Business Income) - and mine is)  -- based on gross? Using 80% of the gross? I'm mildly confused. Thanks. 

[DianeW777]

The answer to your related question is:

The qualified business income (QBI) is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. This would be you net profit from your business.

@T2T2T2 

[ssarfati]

I'm in the same boat, but mine is even more grossly mismatched. Is it because I have an NEC as part of my income? Because it's post-expenses? I'm so confused, and TT "customer service" is either unhelpfully robotic or outsourced (Sykes/Sitel/Alpine) and completely ineffectual due to poor training.

[SantinoD]

Annualized income is an estimate of the sum of money that an individual or a business generates over a year's time. Annualized income is calculated with less than one year's worth of data, so it is only an approximation of total income for the year.

To avoid a penalty for tax underpayment, the total tax withholdings and estimated tax payments must equal to the lesser of 90% of the tax owed for the current year or the full tax owed the previous year.

To avoid underpayment penalties due to fluctuating income, the IRS Form 2210 allows you to annualize income for a particular quarter and compute the estimated tax payments based on that amount. Schedule AI of Form 2210 provides a column for each quarterly period, and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate.

Use the link here to add form 2210: How do I add Form 2210?

@ssarfati