Annualization when one spouse is self employed and one is not

[monniewolf]

I started contracting for a company in September of 2020. My husband is a regular employee of a company that gets paid regularly throughout the year.
I paid estimated taxes for the 4th quarter of 2020 on my self-employed income, but using the tax rate for combined income, since we file jointly.

I now have an underpayment penalty. If I annualize my income, I noticed TurboTax asks not only how much cumulative income I made as a contractor each period, but also the cumulative adjusted gross income for each period. This obviously includes my husbands income. Can I just divide his income into the 4 periods, since he earned evenly over the year?

Also does the fact that the AGI is included in the annualization mean I should be paying estimated taxes on our AGI and not just my contractor income? My husband has normal withholdings each paycheck, so I assumed I would only pay estimated taxes on my income. For this year, I am still contracting, but my income varies throughout the year, so I will need to annualize for this year as well.

[JohnB5677]

Yes, you can divide your husbands income into 4 pay periods and include it in each quarter.

The second part of your question refers to two different calculations.

• The first is the process of annualization.  By annualizing your income you may be able to reduce or eliminate penalties by showing that you earned a greater portion of your income at the end of the year.  Your husbands income would be allocated equally, but yours would be weighted toward the end of the year.
• The second is the calculation of estimated taxes.  This is where the AGI comes in.  Both incomes are considered in the calculation.  There is no quarterly calculation for estimated taxes.  The taxes your husband has withheld from his paycheck should be included, and the vouchers will reflect the quarterly balance of taxes owed.