Vol. 97, No. 6

Rethinking Tax Information: The Case for Quarterly 1099s

Kathleen DeLaney Thomas*
Tax Law
Articles

When an electricity provider wants customers to pay their bills monthly, it sends them a bill each month. Yet, this is not how the tax system works—at least not for independent contractors. Their taxes are due quarterly, but they receive a tax statement (Form 1099) only one time a year. It is up to the individual, then, to know when their taxes are due and how to pay them, and it is on that individual to estimate how much they owe each quarter. As a result, compliance for independent contractors—particularly for online platform workers—tends to be lacking. Failure to pay their estimated taxes subjects these taxpayers to potential penalties and causes the government to collect less tax revenue.

There is a simple—yet entirely overlooked—reform that could vastly improve compliance when it comes to paying estimated taxes: third-party information returns (Form 1099s) should be issued to taxpayers on a quarterly basis. The idea is straightforward and intuitive. If the government wants people to pay taxes four times per year, it needs to effectively “bill” them four times per year. This idea is supported by social science research showing that, the more taxpayers are reminded to pay their taxes, the more likely they are to do so.

This Article is the first to propose quarterly tax information returns. It offers a detailed proposal for a new Form 1099-ES, which would communicate quarterly earnings and provide guidance on how much to pay in estimated taxes. In doing so, this Article argues for rethinking the conventional wisdom surrounding tax information, taking a more taxpayer-focused approach. Rather than viewing Form 1099s solely as a source of information for the government to monitor taxpayers and deter cheating, we should also view the role of information returns as assisting taxpayers in tracking their income and estimating their tax liability. When viewed in this light, the goal should not necessarily be more year-end returns to more people, but instead should be more frequent and useful information for taxpayers.

INTRODUCTION

When an electricity provider wants customers to pay their bills monthly, it sends them a bill each month. It would border on the absurd to do it differently. But imagine if an electricity provider wanted customers to pay their bill every month, yet it sent only one bill at the end of the year showing the customer’s total electricity use. This would certainly cut down on billing costs for the company, but at a steep price. People would undoubtedly miscalculate their monthly bills, pay the bills late, or forget to pay the bills altogether. Thus, unsurprisingly, whether it is utility companies, mobile phone service providers, or credit card companies, businesses that want to be paid monthly bill their customers monthly, often sending multiple reminders. Those communications not only remind customers to pay, but they also provide instructions—such as a link to an online payment website or a pre-addressed envelope—to make it as easy as possible.

Yet this is not how the tax system works, at least not for independent contractors. Their taxes are due quarterly, but they receive a tax statement only one time a year.¹ By the time independent contractors receive a Form 1099 reporting their earnings, typically in February of the following year, all four quarterly tax payment deadlines have come and gone.² It is up to the individual, then, to know when their taxes are due and how to pay them, and it is on that individual to estimate how much they should pay in taxes each quarter.

The significance of this asymmetry cannot be understated: the government expects taxpayers to take affirmative steps to make a tax payment four times per year, yet the government requires taxpayers receive information (through a third-party Form 1099) only once a year. It is, therefore, entirely unsurprising that compliance for independent contractors, particularly for online platform workers, is lacking.³ Studies indicate significant noncompliance when it comes to paying estimated taxes, which subjects these taxpayers to potential penalties and causes the government to collect less tax revenue.⁴

There is a simple—yet entirely overlooked—reform that could vastly improve compliance when it comes to paying estimated taxes: third-party information returns (Form 1099s) should be issued to taxpayers on a quarterly basis. This new quarterly information return—what this Article calls “Form 1099-ES”—should communicate the taxpayer’s quarterly earnings and provide clear instructions for how to make estimated tax payments, including guidance on how much to pay.⁵ The idea is straightforward and intuitive. If the government wants people to pay taxes four times per year, it needs to effectively “bill” them four times per year. Further, this idea is supported by recent social science research. That research shows that informational “nudges” are effective at motivating individuals to act, including paying their taxes on time.⁶ In other words, the more taxpayers are reminded to pay their taxes and the easier the process is, the more likely they are to do so.

This Article is the first to propose quarterly information returns. It urges Congress to require quarterly 1099s be sent to online platform workers who are already receiving an annual Form 1099-K, but who otherwise receive no assistance in making estimated tax payments.⁷ In doing so, this Article argues for rethinking the conventional wisdom surrounding tax information, taking a more taxpayer-focused approach.

Traditionally, scholars and policymakers have viewed third-party information returns, such as a Form 1099-K, as having two main functions, both of which aid Internal Revenue Service (“IRS”) enforcement efforts.⁸ One function is to tell the IRS what the taxpayer has earned. The second function is to serve as a deterrent. If taxpayers know the IRS is going to receive information about their income from third parties, they are far more likely to report their income accurately.

Recent expansions to Form 1099 reporting reflect this traditional view of information returns. In 2021, Congress passed legislation requiring online platforms, such as Venmo, PayPal, Airbnb, and Etsy, to send a Form 1099-K to taxpayers earning more than $600 of business income during the year through those platforms.⁹ This was a substantial change from the prior threshold of $20,000 and was designed specifically to raise revenue by subjecting more taxpayers to information reporting.¹⁰ Some critics of the new legislation have questioned whether the IRS has sufficient capability to process the influx of new information returns, while others have lamented that the new rules will lead to taxpayer confusion, anxiety, and possible over-reporting of tax liability.¹¹

While the efficacy of the new Form 1099-K reporting threshold remains to be seen, the rule reflects the overall trend in improving tax compliance over the past half a century: more year-end tax forms to more taxpayers. In gradually expanding information reporting requirements over the past several decades, the government has cast an increasingly wider net. But this wider net has come with virtually no safeguards for the taxpayers newly covered by information reporting.

This Article urges policymakers to look beyond the traditional policing function of 1099s and proposes a third, equally important function of information reporting. Rather than viewing 1099s solely as a source of information for the government to monitor taxpayers and deter cheating, we should also view the role of information returns as assisting taxpayers in tracking their income and estimating their tax liability. When viewed in this light, the goal should not necessarily be more year-end returns to more people, but instead should be more frequent information to taxpayers who are already obligated to report taxable income. The current system, in which taxpayers do not receive information until their deadlines to pay quarterly taxes have come and gone, falls woefully short.

This Article’s ultimate argument is that rethinking tax information means harnessing the ability of third parties to quickly process and distribute tax information in ways that will first and foremost help taxpayers. The cost to third parties of sending these quarterly statements to taxpayers would be minor, and it would impose no additional administrative costs on the IRS. (The IRS would continue to receive the taxpayer’s Form 1099 at the end of the year, but only the taxpayer would receive it quarterly.)

Rethinking the role of tax information as assisting taxpayers in meeting their payment obligations not only protects taxpayers from penalties and other burdens, but it should also result in higher tax compliance and more revenue raised. In other words, rethinking tax information in this way would only strengthen and enhance the traditional goals of information reporting.

This Article proceeds in four parts. Part I provides background on tax information reporting and surveys recent legislative changes to expand Form 1099 reporting. It also discusses the benefits and risks of expanding year-end information reporting. Part II explores the challenges faced by independent contractors like online platform workers in making timely tax payments. Part III then explores social science literature supporting the idea that, the more tax communications taxpayers receive, the more compliant they will be. Part IV offers a concrete proposal for quarterly information returns for platform workers (a new Form 1099-ES), including how to best design these returns to maximize accurate and timely tax payment. Part IV also proposes a simple safe harbor formula for calculating estimated tax payments: five percent of gross payments. The safe harbor would allow taxpayers to quickly and easily figure out how much to pay each quarter to avoid estimated tax penalties.

Quarterly information returns are a viable solution to a problem that has taken on increasing significance in recent years due to a growing gig economy and rising number of independent contractors. Mandating that certain businesses send their workers a Form 1099 every quarter would impose tax compliance costs on those entities that are best suited to handle those costs efficiently. At the same time, this reform would make the tax system more equitable for lower income workers who struggle to meet their tax compliance burdens.

I. THIRD-PARTY INFORMATION REPORTING: BACKGROUND AND CONSIDERATIONS

This Part offers a brief overview on the current law regarding third-party information reporting and tax payment obligations. As this Part explains, information reporting is a vital tool that ensures tax compliance and aids in the government’s collection of revenue.

A. What Is Third-Party Information Reporting?

The United States tax system is generally based on “voluntary compliance,” meaning the government relies on taxpayers to voluntarily self-report their taxable income each year on their tax return.¹² However, the most important way in which the government ensures that taxpayers report their income accurately is third-party information reporting.¹³ Third-party information reporting describes a system in which a third party (that is, not the taxpayer or the IRS) reports the taxpayer’s income on an information return.¹⁴ The third party is often (though not always) the same person or entity that pays the income to the taxpayer. That information return, such as a Form W-2 or Form 1099, is sent to both the taxpayer and to the IRS after the end of the year.¹⁵ The IRS then uses the form to monitor whether the taxpayer has accurately reported the income on their tax return, often through an automated process.¹⁶

Whether income is subject to third-party information reporting depends on the source of the income and how much the taxpayer earns. Employee wages are generally reportable on Form W-2 and are also subject to withholding.¹⁷ Other forms of income, such as interest, dividends, and sales of securities by brokers, as well as certain payments to independent contractors, are reportable on a Form 1099 (though not subject to withholding).¹⁸

B. Purpose and the Benefits

In ensuring that taxpayers report and pay their taxes, the government’s primary challenge is information asymmetry: taxpayers have more information about their income than the IRS. The most powerful mechanism to correct this asymmetry, thereby ensuring that most income gets reported accurately, is third-party information reporting.¹⁹ IRS compliance statistics bear this out. The overall rate of compliance in the United States, measured by the ratio of taxes collected versus taxes owed, is about 85%.²⁰ Much of that high compliance rate is attributable to income that is subject to information reporting.²¹

For employee wages, which are both reported on a Form W-2 and subject to withholding, compliance is nearly perfect (99%).²² Income that is not subject to withholding but subject to substantial information reporting, such as interest and dividends, is also reported accurately at very high rates (94%).²³ On the other hand, compliance is significantly lower when information reporting is not present. The IRS estimates the compliance rate for income not subject to information reporting to be 45%, meaning less than half of such income gets reported by taxpayers.²⁴ Simply put, taxpayers are much more likely to report income that gets reported to the IRS by a third party and are more likely to cheat when their income is not being reported by a third party.

These statistics demonstrate that information reporting is highly effective at achieving its intended purpose of ensuring tax compliance. Commentators note two reasons that information reporting is so effective. First, providing the IRS with information about taxpayers allows the agency to pursue those who underreport their income.²⁵ Much of this matching of information returns with taxpayers’ tax returns is done automatically through IRS computer programs.²⁶ Second, information reporting acts as a deterrent because taxpayers likely know the IRS is receiving information about their income.²⁷ Professor Leandra Lederman compares this effect to red light cameras that catch drivers running red lights: “[T]he taxpayer is aware the government is watching.”²⁸

C. Information Reporting for Platform Workers

Two information-reporting provisions are particularly relevant for taxpayers earning income through online platforms, who are the focus of this Article. First, certain payments made to independent contractors are reportable on Form 1099-MISC if the payments exceed $600 during the year.²⁹ More specifically, if a business pays an independent contractor more than $600 for the provision of services, the business must send the individual (and the IRS) a Form 1099-MISC.

In 2008, Congress expanded information reporting for some independent contractors that are paid through “third party settlement organizations” (“TPSOs”).³⁰ A TPSO generally serves as an intermediary to facilitate online transactions between buyers and sellers, charging a fee for its services.³¹ TPSOs include online payment platforms, like Venmo and PayPal, as well as other types of platforms on which taxpayers earn income from performing services or selling goods, like Uber or Etsy.³² The 2008 legislation required the online platform to issue a Form 1099-K to any taxpayer who was paid more than $20,000 and accumulated payments from more than 200 transactions on the platform during the tax year.³³ The higher $20,000 threshold “trumped” the $600 threshold under the 1099-MISC rules if both applied, meaning independent contractors paid through online platforms were subject to a much higher threshold for information reporting.³⁴

Commentators criticized this disparity in the information reporting thresholds—$600 versus $20,000/200 transactions—as confusing and arbitrary.³⁵ For example, if a painter was paid $5,000 by a business for a job, they would receive a Form 1099-MISC. But if a painter was hired and paid through an online platform like TaskRabbit, the Form 1099-K rules only required information reporting if that painter earned over $20,000 through the platform and had over 200 payment transactions. As a result, many independent contractors earning income through online platforms were not subject to any information reporting at all, because they never met the high payment and transactions threshold.³⁶

In response to these criticisms, and due to growing concern about lack of tax compliance in the gig economy, Congress amended the reporting threshold for Form 1099-K in 2021.³⁷ The new rule, enacted as part of the American Rescue Plan, unified the reporting threshold between the 1099-MISC rules and the 1099-K rules.³⁸ Now, online platforms must issue a Form 1099-K to any taxpayer who earns more than $600 from the platform during the tax year; there is no minimum number of transactions required.³⁹ This new reporting threshold, which does not take effect until 2025, is expected to substantially increase the number of taxpayers subject to information reporting and raise an estimate $8.4 billion in additional revenue over the next decade.⁴⁰

Notwithstanding the revenue and compliance benefits from expanding Form 1099-K reporting to cover more platform workers, the new legislation has also been met with significant criticism from all sides. The biggest source of such criticism is that the new threshold casts too wide a net and will inadvertently capture transactions that are not subject to tax.⁴¹ Technically, the 1099-K rules only apply to business income and not personal transactions.⁴² For example, a painter earning fees on Venmo should receive a Form 1099 if total annual fees exceed $600. But if an individual collects contributions for a group gift on Venmo, those transactions should not be reportable because they are personal in nature. However, it is possible that TPSOs (like Venmo) will not be able to adequately distinguish which transactions are reportable and which are not, with the result that too many Forms 1099-K will be issued. This, in turn, is likely to cause confusion among taxpayers, who may mistakenly believe the Form 1099-K means they have to report a transaction even if that transaction is not taxable (for example, if it is a gift).⁴³

Another source of potential confusion is that Forms 1099-K generally report gross earnings, which may differ significantly from taxable income, particularly for taxpayers who engage in selling goods.⁴⁴ As an example, imagine a taxpayer knits scarves and sells them on Etsy. Further imagine this taxpayer spent $700 on materials during the year and earned $1,000 in gross sales through the platform. The taxpayer’s net income, after accounting for their costs, is only $300 ($1,000 minus $700), and therefore only $300 is reportable for tax purposes. But, under the new 1099-K rules, Etsy will issue the taxpayer a Form 1099-K reflecting $1,000 in sales, because that gross amount is over the threshold. Critics argue that taxpayers may fail to understand that, although their Form 1099 says $1,000, the taxpayer may report a lower amount of income on their tax return.⁴⁵ Commentators also argue that confusion about the new rules will deter taxpayers from participating in online marketplaces.⁴⁶

Even for taxpayers who understand that their Form 1099 shows income that is not taxable—either because the transaction is not taxable or because the Form 1099 reflects a gross income amount—there may be anxiety and confusion over how to reconcile the form with their tax return. Taxpayers may overreport their income just to avoid IRS scrutiny, or may have to incur the cost of a tax professional to ensure they are in compliance with the law.⁴⁷ The IRS has delayed enforcement of the new 1099-K rules by several years in response to these concerns, stating that the delay will help “reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation.”⁴⁸

Another line of criticism of the new 1099-K rules is that the IRS does not have the enforcement capacity to handle the new influx of information returns, many of which may not even pertain to taxable transactions.⁴⁹ For example, the Coalition for 1099-K Fairness argues:

[T]his new requirement will place a greater strain on the IRS, increasing processing delays for American taxpayers and small businesses. At the end of May 2022, the IRS had a backlog of 21.3 million unprocessed paper tax returns. . . . Because many of these casual sellers will not have taxable income resulting from these transactions, the burden on the IRS will not result in collection of additional tax revenue.⁵⁰

Finally, even those who support expanding information reporting for platform workers have argued that the $600 threshold is simply too low, reflecting a reporting threshold for independent contractors that dates back to the 1950s and has not been adjusted for inflation.⁵¹ In response to concerns about the threshold level, Congressional Democrats have introduced a bill to raise the threshold for 1099-K reporting to $5,000.⁵²

D. Lessons Learned from Recent 1099-K Reform

The recent change to the Form 1099-K rules offers a compelling illustration of the tradeoffs inherent in expanding information reporting. On the one hand, the lower threshold for online platforms was a long time coming. Scholars and organizations like the Government Accountability Office (“GAO”) had been urging Congress for years to lower the $20,000/200 transaction threshold to account for the fact that many platform workers were not receiving a Form 1099.⁵³ And, as discussed above, information reporting is vital to ensure that platform workers and other independent contractors report their income. But while increasing the number of taxpayers receiving 1099s will reduce evasion and enhance revenue collection, it comes at a cost of added complexity for taxpayers, who may not know how to report income reflected on a 1099.⁵⁴ Taxpayer confusion or mistakes also impose an increased enforcement burden on the IRS, as does processing additional 1099s.⁵⁵

In sum, the new Form 1099-K rule, which lowers the reporting threshold for payments from online platforms to $600, reflects the general trend in expanding information reporting over the past several decades.⁵⁶ That trend is to require more year-end 1099s, which means more taxpayers will receive them. But receiving a Form 1099 at the end of the year, by itself, does little to help platform workers fulfill their tax obligations if they don’t already have a good understanding of the tax law. The next Part explores the tax compliance challenges faced by online platform workers and other independent contractors.

II. THE PROBLEM: NONCOMPLIANCE AMONG INDEPENDENT CONTRACTORS

This Part provides background on the tax compliance obligations of platform workers and other independent contractors. As this Part shows, because they are not treated as employees for tax purposes, platform workers often face significant tax compliance burdens and may lack the expertise to fully comply.

A. Tax Compliance Obligations of Platform Workers

Online platform workers are generally treated as independent contractors, rather than employees, for tax purposes.⁵⁷ The tax consequences of this distinction are significant for the worker: while employees have their taxes withheld and paid by their employer, independent contractors are responsible for paying taxes on their own.⁵⁸ This means platform workers generally must budget for taxes and make estimated tax payments four times per year,⁵⁹ in addition to filing a year-end tax return and paying any additional balance due. Failure to make estimated tax payments can result in a tax penalty.⁶⁰

Taxpayers have two options to calculate their estimated tax payments in a manner that avoids penalties. First, they can pay 100% of their prior year’s tax liability through estimated taxes, and they will not face a penalty even if they end up owing more tax after the year is over.⁶¹ For example, if a taxpayer paid $5,000 in taxes in 2022, they can pay $5,000 during the course of 2023 through estimated taxes. Even if their total tax liability for 2023 is $8,000, and they owe another $3,000 at the end of the year, they will not face a penalty for failing to pay enough estimated tax. The other option is to pay enough estimated taxes to satisfy 90% of that year’s tax liability.⁶² This means that, for a taxpayer who owes $20,000 in tax at the end of 2023, they must have paid at least $18,000 during the year to avoid an estimated tax penalty. In any case, taxpayers are not subject to an estimated tax penalty if the total tax owed for the year is less than $1,000.⁶³

Independent contractors are also responsible for paying self-employment taxes on their net earnings. For employees, employment taxes are split between the employee and the employer, with employees bearing responsibility for a 7.65% tax on their wages⁶⁴ and employers bearing responsibility for another 7.65% on those wages.⁶⁵ In addition to paying half of the employment tax, the employer withholds the employee’s share of employment taxes and pays them to the IRS,⁶⁶ so the employee can effectively ignore these obligations. On the other hand, independent contractors are responsible for both portions shared by employers and employees, or a 15.3% self-employment tax on net earnings.⁶⁷ These workers must include payments for self-employment tax in their quarterly estimated tax payments.

Finally, in addition to paying quarterly taxes, which include both income and self-employment taxes, independent contractors must track their deductible business expenses and report them on Schedule C to their Form 1040.⁶⁸ This imposes further compliance costs and complexity compared to employees because workers must know which expenses are deductible, keep records to substantiate those expenses, and spend additional time preparing their year-end tax return (or spend money hiring a tax professional).

B. Many Platform Workers Struggle with Tax Compliance Obligations

The rise of online platforms has made it easier than ever before to become an independent contractor.⁶⁹ But this low barrier to entry means that many platform workers are young and financially inexperienced, particularly when it comes to managing tax obligations.⁷⁰ Even taxpayers with years of employment experience do not necessarily know how to manage the tax obligations associated with independent contractor status. For example, a survey of platform workers published in 2016 found that a third of such workers did not know whether they had to pay quarterly estimated taxes.⁷¹ Nearly half of the respondents also did not know how much they would owe in taxes and did not set aside money for taxes.⁷²

In a 2020 Report to Congress, the GAO documented the top tax compliance challenges faced by platform workers, which include understanding the tax responsibilities of independent contractors, receiving adequate information about their earnings (particularly when there is no Form 1099 reporting), and saving for and making quarterly estimated tax payments.⁷³ As to the third challenge, the report observes:

Because earnings of some platform workers may be low and earnings and expenses may fluctuate, they can have difficulty estimating their taxes owed and setting aside money to pay the taxes. . . . To the extent these burdens and difficulties confuse workers, they are less likely to pay the estimated tax payments fully and on time and may incur a penalty as a result. . . . [I]f the penalty or amount owed is more than workers can afford, they are at risk of falling into a cycle of noncompliance.⁷⁴

Researchers have also noted that another negative effect of failing to properly save for and remit estimated taxes relates to platform workers’ Social Security contributions. Not only does failing to fulfill their tax obligations subject workers to possible penalties and cause the government to collect less revenue, but workers also jeopardize their future Social Security benefits, as such benefits are based on previously reported earnings.⁷⁵ Further, platform workers who do not report their income (or do not report enough income) may also miss out on tax credits that could help them financially, such as the Earned Income Tax Credit.⁷⁶

C. Estimated Tax Penalties Have Increased with Rise of Platform Economy

As further evidence that platform workers are struggling with their tax compliance obligations, IRS data shows that the number of estimated tax penalties has increased substantially over the past two decades.⁷⁷ Specifically, the number of individual returns for which an estimated tax penalty was assessed has risen significantly alongside the expansion of the platform economy.⁷⁸ For example, in 2012, 7.1 million individual estimated tax penalties were assessed, while in 2022, 12.2 million estimated penalties were assessed, representing a 72% increase.⁷⁹ While other factors may play a role in the number of estimated tax penalties assessed, the general trend is consistent with the growth in online platform work.⁸⁰ It is worth repeating that when platform workers fail to pay estimated taxes, it not only deprives the government of tax revenue, but also harms the worker, because they may find themselves subject to back taxes and penalties they cannot afford.⁸¹

Figure 1 shows the total number of individual estimated tax penalties assessed from 2000 to 2022, with a notable increase over the past decade.⁸²

Figure 1. Number of Individual Estimated Tax Penalties Assessed from 2000–2022 (in Millions)

III. SOCIAL SCIENCE LITERATURE SUPPORTING A SOLUTION

Part II explained the complexity faced by platform workers in meeting tax compliance obligations. In particular, because they do not have their taxes withheld, these workers must take affirmative steps to estimate and pay their taxes each quarter. This Part looks to social science research to understand why paying taxes is so psychologically difficult and what can be done to motivate taxpayers to comply. As this Part reveals, noncompliance by independent contractors is not just a matter of lacking sufficient knowledge. Rather, taking affirmative steps to pay taxes on time requires motivation, self-control, and planning. Research over the past several decades on so-called behavioral nudges shows that policy design can have a drastic impact on whether individuals engage in desired behaviors like paying taxes. This research shows that, the easier and simpler obligations are made for people, the more likely they will comply with those obligations. Section A first describes the broader social science research on nudges. Section B discusses specific studies relating to tax compliance that suggest that more frequent reminders to pay would likely improve tax compliance for independent contractors.

A. Reasons for Tax Noncompliance and How Nudges Can Help

This Section first discusses psychological factors that contribute to taxpayers not meeting their payment obligations, even when they are aware of them. It also introduces the concept of nudges and discusses how these behavioral interventions can motivate desired behavior, including compliance with legal obligations.

1. Why Taxpayers May Struggle to Pay Estimated Taxes

There are a number of reasons that taxpayers fail to report their income and pay their taxes. One is simply opportunity. Recall that when taxpayers are not subject to third-party information reporting, they demonstrate low levels of compliance, which is unsurprising because they are unlikely to get caught. Scholars have also explored many non-economic factors that may contribute to noncompliance, such as social norms of noncompliance or perceptions that the tax system is unfair.⁸³

The focus of this Article, however, is on independent contractors—particularly online platform workers—who receive an annual Form 1099-K. For these taxpayers, there is little opportunity to underreport their income without getting caught, yet their compliance is still often lacking, particularly when it comes to making timely payments of quarterly estimated taxes.⁸⁴ In other words, workers who receive a Form 1099 are less likely to try to conceal their earnings (since they are likely to get caught) but may fail to pay timely taxes on those earnings. As discussed above in Part II, research reveals that many platform workers may simply fail to understand the tax consequences of independent contractor status. However, lack of knowledge is unlikely to be the only reason for noncompliance.

Recall that platform workers and other independent contractors do not have the benefit of having their taxes withheld.⁸⁵ This means they are responsible for tracking their earnings, budgeting for taxes from those earnings, and making quarterly remittances. A number of well-documented psychological biases likely make this difficult for many taxpayers, even if they have no intention of cheating. First, humans have limited attention and are inherently forgetful.⁸⁶ This is why a doctor’s office or a restaurant sends us one or more reminders about upcoming appointments or reservations.⁸⁷ For platform workers and other independent contractors, making quarterly tax payments without any reminder to do so is no small feat.

Even aside from the fact that taxpayers may simply forget about estimated tax deadlines, people also tend to procrastinate and lack self-control.⁸⁸ This might make it hard for taxpayers to follow through with making estimated tax payments despite their awareness of the obligation and despite their best intentions. This tendency to procrastinate is well-documented in the context of saving for retirement, where people frequently save less than they think they should.⁸⁹

Finally, people might avoid paying estimated taxes altogether because they find it difficult or overwhelming. The payments themselves can be made online (or through the IRS2Go app), and finding and navigating the IRS website to make the payments is a relatively straightforward process.⁹⁰ But calculating the amount of the payments is not, and this difficulty only serves as a further source of psychological friction for platform workers.

Recall that independent contractors can avoid estimated tax penalties by paying 100% of their prior year tax liability or 90% of their current tax liability.⁹¹ While these rules are not as complex as other parts of the tax law, they are not quickly and easily applied. Taxpayers who do not prepare their own returns may not have quick and easy access to a copy of their return to refer to their tax liability for the prior year. Many are likely not even aware of the safe harbor that allows them to rely upon last year’s tax liability. Further, estimating tax liability to rely on the 90% rule is not easy. Taxpayers may not realize that they need to estimate both their income tax liability and their self-employment tax liability to meet these obligations. Studies also show that most people don’t know what their average or marginal tax rates are, making it difficult to estimate one’s prospective income tax liability.⁹²

A taxpayer who consults IRS Form 1040-ES: Estimated Tax for Individuals, will be confronted with twelve pages of instructions for estimating and paying these taxes.⁹³ To determine the amount of estimated tax one should pay, the form points taxpayers to the Estimated Tax Worksheet, which is a full-page worksheet containing fifteen line items.⁹⁴ Several of these line items have multiple parts (for example, a, b, and c) that require computations. One of the line items is the taxpayer’s self-employment tax liability, which is calculated on yet another full-page worksheet with six line items.⁹⁵

It is worth pausing here to observe the numerous obstacles that stand between platform workers and their tax obligations. One is simply knowledge; the taxpayer must understand what it means to be an independent contractor for tax purposes. But even if a taxpayer has a general understanding that they are solely responsible for their tax payments because they don’t have an employer to withhold, there are numerous sources of friction that make it less likely the taxpayer will comply. There are no required reminders to pay, the deadlines are not obvious, and the actual process of calculating estimated payments is complex and requires significant work on the part of the taxpayer.

2. Information Reporting as a Nudge

The reasons that independent contractors often struggle to pay their taxes on time are both intuitive and well-documented in the literature. Paying estimated taxes takes memory, planning, motivation, and self-control. In short, the current tax regime creates high levels of psychological friction for taxpayers who do not have their taxes withheld or who do not have access to tax advisors. There is a role here for a quarterly Form 1099 to help reduce this friction by serving as a “nudge.”

As defined by Richard Thaler and Cass Sunstein, a “nudge” is an intervention that “alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”⁹⁶ In other words, nudges encourage people to engage in desired behavior without offering them significant financial incentives or coercing them through the threat of punishment.⁹⁷ Nudges often accomplish this by making a desired action simpler or easier for people.⁹⁸ Research has shown, for example, that when employees are automatically enrolled in 401K savings plans as a default, enrollment in those plans is significantly higher as compared to when employees have to take affirmative steps to enroll in such plans.⁹⁹

In addition to helping people overcome inertia and procrastination, nudges might also provide information or reminders to encourage behavior, such as simplifying form instructions or sending text message reminders.¹⁰⁰ For example, a New York City program that sent text message reminders to people right before they were due to appear in court significantly reduced the number of people who failed to appear.¹⁰¹ The rate of failure to appear in court declined even more when the text reminders were paired with a redesigned summons form that more prominently displayed pertinent information, such as where and when to appear, and the consequences of not appearing.¹⁰² Governments around the world have increasingly employed nudges to achieve a variety of other public policy goals, from promoting health, protecting the environment, and encouraging people to vote.¹⁰³

As illustrated by the success of automatic enrollment in retirement plans, nudges are well suited to guide behavior when procrastination, inertia, and similar psychological frictions are involved. This makes payment of taxes by platform workers an ideal candidate for nudges. Particularly, a nudge that could provide both information and a reminder to the taxpayer about paying estimated taxes—similar to the text reminder and redesigned summons form in the New York City program—could significantly enhance compliance. And policymakers would not need to reinvent the wheel because a source of information for taxpayers already exists: the Form 1099. Part IV develops a specific proposal for a redesigned Form 1099 that a taxpayer would receive quarterly: serving both as a source of information (how much income was earned and what steps must be taken to pay taxes) and as a reminder to pay immediately prior to each deadline.

When considering why platform workers struggle to meet tax payment obligations, the Form 1099 has the potential to take on a new and powerful role in enhancing tax compliance. To be sure, the traditional function of the 1099—as a way to inform the government of the taxpayer’s earnings and to deter cheating—will always be paramount. But a well-designed system of information reporting can also serve as a nudge. The 1099 can provide information, simplification, and timely reminders to pay, with little extra administrative cost. Before turning to the specifics of the proposal for a quarterly 1099, the next Section explores the social science literature on what makes an effective informational nudge, particularly in the context of taxes.

B. Designing Effective Informational Nudges

This Section discusses recent studies showing how a well-designed nudge, in the form of a reminder letter, can improve tax compliance. It then uses the insights from these studies to describe how a quarterly 1099 could be best designed to improve tax compliance by platform workers.

1. Reminders to Pay Taxes Are Effective and Timing Matters

Several recent empirical studies show that sending letters reminding people to pay their taxes results in a higher likelihood of payment.¹⁰⁴ For example, one field study examined the effect of mailing reminder letters to property owners who had obligations to pay quarterly property taxes.¹⁰⁵ While one group in the study received brief reminder letters every quarter for a year, a second group in the study received a one-time mailing with a guide to develop a financial plan, as well as a follow up phone call from a financial counselor.¹⁰⁶ The one-time financial planning packet and offer of free counseling had no effect on timely property tax payments.¹⁰⁷ But the quarterly reminders reduced the rate of default on property taxes by one third.¹⁰⁸ The study’s authors concluded that “repeated, generic reminders” were more effective at prompting timely payment than “customized information about their obligations” that was sent to taxpayers only one time.¹⁰⁹

Another field study conducted with the Ministry of Finance in Ontario examined the effect of sending letters to business organizations who were late in meeting their payroll tax obligations.¹¹⁰ The experimental letter, which gave step-by-step instructions for how and when to make payment, increased the likelihood of payment in the year the letter was sent.¹¹¹ However, the study showed no evidence that receiving the experimental letter improved compliance in the following year.¹¹² On the other hand, when some businesses were sent another letter in the subsequent year, compliance increased, suggesting that such letters are “most effective when they proximately precede a decision point.”¹¹³

These studies indicate that nudging tax compliance through reminders is effective and, importantly, the timing of those communications matters. But for platform workers and other independent contractors, there is currently no system of reminders for when payment is due. While the annual Form 1099 does communicate vital information to taxpayers about their total earnings from a particular payer, it is only received after the tax year has ended, long after the taxpayer’s four estimated tax payment deadlines have come on and gone.¹¹⁴

The studies discussed above suggest that communications that do not immediately precede payment deadlines are unlikely to prompt payment and, concededly, the current Form 1099 was not designed to serve as a nudge. However, there is no reason that third-party information reporting can’t continue in its current role (mainly as a deterrent) while also serving as a reminder for the taxpayer. It is both intuitive and supported by empirical research that, if the government wants to encourage timely tax payments, it should prompt taxpayers to do so immediately preceding the deadlines for such payments. Thus, taxpayers should receive third-party tax information each quarter, leading up to the deadline for their quarterly estimated tax payments.

2. Planning Prompts Are Effective

Not only does the timing of information matter, but the content of reminder notices also impacts compliance. Specifically, the aforementioned experiment with the Ministry of Finance in Ontario showed that experimental late notices that contained “planning prompts” were more effective at improving compliance than a standard late notice.¹¹⁵ Planning prompts—nudges designed to help people make specific plans for how and when they will take an action—have been shown to help people overcome inertia and procrastination in a variety of settings.¹¹⁶ For example, planning prompts that ask voters to indicate where and what day they will vote have been shown to improve voter turnout.¹¹⁷ Similarly, text message reminders that included a link to make an appointment were found to increase uptake of COVID-19 vaccinations.¹¹⁸

In the Ontario tax study, the experimental letter gave taxpayers instructions about how and where to file their payroll tax return, along with a specific deadline of when to file it.¹¹⁹ By way of contrast, the standard letter (serving as a control) simply told taxpayers to pay “immediately.”¹²⁰ In summarizing the success of the experimental letter in improving compliance, the study authors observed:

Drawing on the insight that people often fail to act on their motivations, we argue that overdue tax payments might not only result from the lack of sufficient motivation or ability to pay, but also from the absence of a concrete plan of how to act on those motivations. Importantly, providing a plan with an explicit deadline and specific instructions for its implementation appears to encourage organizational taxpayers to act and aids in overcoming barriers of procrastination or forgetfulness . . . .¹²¹

The Ontario tax study, and other research on the effectiveness of planning prompts, indicates that a well-designed nudge may help people follow through on intended behavior by providing them with concrete steps for how to act. This indicates that quarterly tax information provided to independent contractors would be most effective if the content of the reminder provided specific details about how and when to pay estimated taxes. This idea is developed more in Part IV below.

3. Formality Matters

Finally, research shows that formal communications from the government may be more effective at nudging behavior than informal communications.¹²² A recent set of field studies documents this so-called “formality effect,” in which people responded more to communications that looked official, as opposed to communications that looked less official because they were in colorful font, accompanied by graphics, pictures, or informal language.¹²³ In the study, subjects were more likely to report taking a requested action, such as self-certifying a business or claiming a tax credit, if they received the more formal communication.¹²⁴ The study’s authors hypothesized that people see formality as an indicator of credibility, and that the formal letters conformed with their “expectations about how government communications should look, . . . signaling trustworthiness and competence.”¹²⁵

This recent research observing a formality effect suggests taxpayers may pay more attention to and take more seriously formal communications as opposed to other types of reminders. For this reason, nudging taxpayers to pay quarterly taxes through a Form 1099 is likely more effective than less formal reminders, such as email communications from platform companies.

Consider an Uber driver, for example. Presumably Uber could send the taxpayer an earnings statement each quarter with an explicit reminder to pay estimated taxes. But a Form 1099 is a well-known government form which undoubtedly holds an association in most taxpayers’ minds with reporting and paying taxes. A quarterly 1099 would be salient, formal, and likely received less frequently than other communications from Uber. All of these factors suggest a taxpayer would be more likely to pay attention to and respond to the 1099 than a less formal reminder.

IV. THE PROPOSAL: QUARTERLY INFORMATION RETURNS

Drawing on the lessons from the social science literature discussed in Part III, this Part offers a novel proposal for a quarterly Form 1099. Specifically, it proposes a new Form 1099-ES to be sent to certain taxpayers each quarter, in addition to the annual Form 1099-K. The 1099-ES would be issued to online platform workers ahead of each estimated tax payment deadline. However, unlike the annual Form 1099-K, the 1099-ES would go only to the taxpayer and not the IRS. Nothing would change with respect to the process of year-end reporting on Form 1099-K to both the IRS and the taxpayer.

A. Form 1099-ES: The Basics

This Section discusses the fundamental elements of a Form 1099-ES: when it would be issued and what the form would contain. As the social science research indicates, timing the delivery of Form 1099-ES to immediately precede estimated tax deadlines would help taxpayers comply with these deadlines.¹²⁶ This Section also draws upon the research about planning prompts to propose simple and clear instructions for paying estimated taxes.¹²⁷

1. Timing

Recall that estimated tax payments are due four times per year, fifteen days after each payment period ends.¹²⁸ Confusingly, the payment periods are not broken up into equal three-month quarters. Rather, the four payment periods and corresponding deadlines are as follows (with a two-month period in the spring and a four-month period in the fall)¹²⁹:

Table 1.
Payment Period	Estimated Tax Payment Due Date
January 1 – March 31	April 15
April 1 – May 31	June 15
June 1 – August 31	September 15
September 1 – December 31	January 15

Note that the uneven nature of the payment periods adds complexity and likely makes it even more difficult for taxpayers to remember when to make estimated tax payments.

To assist platform workers in meeting their tax payment obligations in a timely manner, platform companies could be required to send a Form 1099-ES to the worker during the window between the end of the payment period and the estimated payment deadline. Since this period is currently only fifteen days, the best approach to implementing quarterly 1099s would be for Congress to extend the estimated payment deadlines to thirty days after the payment period ends. This would allow for the payer to have fifteen days to issue the 1099-ES and the taxpayer to have fifteen days from receipt of the 1099-ES to make the payment. The proposed schedule would be as follows¹³⁰:

Table 2.
Payment Period	1099-ES Due Date	Estimated Tax Payment Due Date
January 1 – March 31	April 15	April 30
April 1 – May 31	June 15	June 30
June 1 – August 31	September 15	September 30
September 1 – December 31	January 15	January 30

If there were compelling reasons not to change the payment deadlines beyond fifteen days from the end of the pay period, the timeline for sending the Form 1099-ES would have to be shorter. There would be fifteen total days to split between the payer/sender of the 1099-ES and the taxpayer/recipient of the 1099-ES. Each of the two parties has their own obligation. The payer/sender must calculate how much the taxpayer/recipient has been paid that quarter and fill out and deliver the form. The taxpayer/recipient must determine how much estimated tax to pay by the deadline, using the information from the form.

As between the two parties, more time should be allotted to the recipient/taxpayer. Parties sending a 1099-ES will generally be large and sophisticated (for example, a company like Uber), and thus are likely to have the resources to handle their side of the obligations efficiently. On the other hand, as discussed above, individual recipients of a Form 1099 often lack knowledge about how to properly manage their tax obligations and are less likely to have automated processes in place to meet these obligations. Accordingly, the fifteen day period should be split in the taxpayer’s favor. For example, for the pay period ending March 31, the 1099-ES might be due within five days (April 5 in this example), which would leave the taxpayer ten days from receipt of the 1099-ES to meet the deadline. Such a schedule could be as follows:

Table 3.
Payment Period	1099-ES Due Date	Estimated Tax Payment Due Date
January 1 – March 31	April 5	April 15
April 1 – May 31	June 5	June 15
June 1 – August 31	September 5	September 15
September 1 – December 31	January 5	January 15

The key to this timing of delivery of Form 1099-ES would be proximity to the taxpayer’s estimated tax payment deadline. In this way, the 1099-ES would not only provide vital information to the taxpayer about how to meet their obligations (discussed more below), but the receipt of the 1099-ES itself would provide a reminder that estimated taxes must be paid, and that they are due shortly.

It is logical and intuitive that payment reminders would come in close proximity to payment deadlines, and that they come with the same frequency as payment deadlines. Indeed, people are accustomed to this schedule in virtually every other aspect of life in which regular payment deadlines occur. A monthly electricity payment deadline is almost certainly accompanied by the receipt of an electricity bill in the days leading up to the deadline. The receipt of a 1099-ES somewhere between five and fifteen days before estimated tax payments are due would serve the same function as a bill; it would not only help taxpayers determine what they owe, but it would also remind taxpayers that they must make payment.

Given the desirability of timing the Form 1099-ES to be close to the payment deadline, the most efficient means of delivery would be to send it to taxpayers electronically. Current IRS rules allow the annual Form 1099 to be sent electronically (as long as the taxpayer consents), and this method of delivery of tax forms is likely familiar to most platform workers.¹³¹

2. Content of Form

The goal of Form 1099-ES is twofold. First, the form provides a reminder of the taxpayer’s obligation to make a quarterly estimated tax payment. Even for taxpayers who might know exactly how much to pay (because, for example, they are basing their estimated tax payments on the prior year’s tax liability), the form will still serve as a reminder of when to pay. A second and equally important goal of the Form 1099-ES is to help taxpayers calculate and make their estimated tax payments.

Recall that, in the studies discussed above in Part III, individuals were more likely to complete tasks when they were given specific, simple instructions, and completion was made as easy as possible. For example, vaccine uptake increased when individuals were asked to pick a date and given a link to make an appointment.¹³² Similarly, parties were less likely to miss a court date when they received reminders and a simplified summons form with clear instructions about where to go and when.¹³³ In light of this research, the goal of the Form 1099-ES should be to make it as clear and easy as possible for the taxpayer to make estimated tax payments. To that end, the Form 1099-ES should be based on a simplified version of Form 1099-K, with brief instructions about how to calculate and pay estimated taxes.

The current Form 1099-K contains basic identifying information about both the payer and the recipient/taxpayer, along with eight boxes providing gross payments and certain tax information.¹³⁴ Boxes 1 and 5 are most relevant for this purpose: Box 1 shows gross earnings for the entire year, and Box 5, which is broken up into Box 5a-January, Box 5b-February, and so forth, shows earnings for each of the twelve months of the year.¹³⁵ Form 1099-K does not contain any instructions to taxpayers about how to report and pay taxes on their gross earnings reported in Box 1.¹³⁶

The Form 1099-ES would use the template for Form 1099-K as a starting point. In lieu of the current title, “Form 1099-K, Payment Card and Third Party Network Transactions,” the form would simply say “Form 1099-ES, Statement of Quarterly Payments.” The identifying information, such as the taxpayer/recipient’s name, address, and taxpayer identification number, along with the payer’s name and address, would be the same. The only substantive change would be to Box 1. Rather than saying “Gross Amount of Payment” as Form 1099-K does, Box 1 would be broken up into two parts: Box 1a and Box1b.

Box 1a of Form 1099-ES would say “Gross Payments for the Payment Period January 1–March 31” (or adjusted accordingly for the relevant payment period). Box 1a would then contain payments for that pay period only. This would be the key information for determining the taxpayer’s estimated tax payment.

Box 1b would show “Gross Payments Year to Date.”¹³⁷ Box 5 would fill in the payments for each of the relevant months (for example, January, February, and March) as on the regular Form 1099-K.

The top half of the Form 1099-ES would look much like the Form 1099-K, with the exception of the modifications described in the preceding paragraphs. However, the bottom half of Form 1099-ES would contain several short pieces of important information for taxpayers. (Currently, the bottom half of Form 1099-K is blank). The bottom half of Form 1099-ES should communicate the following information: (1) the exact deadline for making an estimated tax payment; (2) the link to make the payment online; and (3) specific, simple information for how to calculate the estimated tax payment based on the gross payments reported. Note, this tracks the social science research indicating that people are most likely to follow through with tasks when they are provided with step-by-step instructions about how to act.¹³⁸ A specific example of these instructions is discussed later in Section IV.B.

3. Simplified Safe Harbor Payment

Implementing an effective quarterly 1099 form would require one substantive law change, which would be a simplified method of calculating estimated taxes. Recall that currently, estimated tax penalties apply unless the taxpayer pays 100% of the prior year’s tax liability or 90% of the current year’s liability (or owes less than $1,000).¹³⁹ None of these lend themselves to a quick and easy calculation that can be communicated in one step on a Form 1099-ES.

The most effective way to encourage platform workers to make an estimated tax payment is to provide a new safe harbor rule that allows them to pay a fixed percentage of the quarterly gross payment that is reflected on the 1099-ES. Importantly, this does not require the taxpayer to have any other information at their disposal (such as last year’s tax liability) other than what is printed on the Form 1099-ES. For example, the Form 1099-ES might tell taxpayers that they can avoid an estimated tax penalty if they pay 5% of their gross payments in estimated tax. For taxpayers that want to do a more detailed calculation of their estimated tax liability, the form could also refer to the longer instructions (and worksheet) for how to do so.¹⁴⁰ The next Section further discusses how such a safe harbor could be calculated.

Although the 90%/100% rules for avoiding an estimated tax penalty are statutory, the Treasury and the IRS could likely implement an administrative safe harbor rule without congressional action.¹⁴¹ In other contexts, the IRS has enacted administrative safe harbor rules which taxpayers can choose to rely on to avoid penalties but are not obligated to follow.¹⁴² One example is the simplified home office deduction. Section 280A of the Internal Revenue Code (“Code”) provides statutory limitations on the deductibility of home office expenses.¹⁴³ However, in Revenue Procedure 2013-13, the IRS provides “an optional safe harbor method that individual taxpayers may use to determine the amount of deductible expenses attributable” to their home office for the year.¹⁴⁴ Under the optional safe harbor, rather than tracking and allocating actual expenses attributable to the home office (such as rent, depreciation, or utilities), taxpayers may instead elect to deduct $5 per square foot of home office space, up to a maximum of 300 square feet ($1,500 total).¹⁴⁵

In the case of this home office safe harbor, the government has made a decision to sacrifice accuracy in the name of tax administration. The Revenue Procedure states:

The Internal Revenue Service (Service) and the Treasury Department recognize that the calculation, allocation, and substantiation of allowable deductions attributable to the use of a portion of the taxpayer’s residence for business purposes can be complex and burdensome for small business owners. Accordingly, the Service and the Treasury Department are providing this optional safe harbor method to reduce the administrative, recordkeeping, and compliance burdens of determining the allowable deduction for certain business use of a residence under § 280A.¹⁴⁶

Taxpayers are not obligated to use the simplified home office deduction; if they think they can claim a higher deduction, they can simply apply the statutory rules for deducting home office expenses.

In the same way, a safe harbor estimated tax payment would offer platform workers an option for calculating estimated tax payments that would allow them to avoid an estimated tax penalty; they would multiply a fixed percentage amount (for instance, 5%) by the gross payment shown on their 1099-ES. For taxpayers who wanted to make a more precise calculation of their estimated tax liability, they would be free to use the statutory rules for avoiding penalties. Like the simplified home office deduction, the simplified safe harbor payment for estimated taxes would provide taxpayers with an easy-to-use formula that could be applied quickly with virtually no administrative hassle.

It is also worth noting that providing taxpayers with a simplified safe harbor payment in the form of a fixed percentage of gross receipts would have no bearing on the taxpayer’s ultimate tax liability. The key to the safe harbor would be to make paying estimated taxes as easy as possible to encourage better compliance with making estimated tax payments. This higher compliance would benefit both the government in its revenue collection efforts, and it would also benefit taxpayers by reducing the amount they must pay at the end of the year. However, a taxpayer’s year-end tax liability would still be calculated under the already existing tax rules.

If the taxpayer owed additional tax at the end of the year because the simplified safe harbor payments did not fully satisfy their tax obligations, the taxpayer would still be obligated to pay that tax with their return. However, they would not face an estimated tax penalty for paying it late. On the other hand, if the simplified safe harbor payments resulted in paying more tax than they owe at the end of the year, the taxpayer would claim a refund with their tax return. In this respect, they would be in the same position as many employees, who often claim refunds because they have more tax withheld than they ultimately owe.¹⁴⁷ This is also true for independent contractors who overpay or underpay their estimated taxes under the statutory rules for avoiding estimated tax penalties.

B. Scope and Implementation of the Form 1099-ES Requirement

A quarterly Form 1099-ES may not be cost effective in all cases, and it is still untested. Accordingly, this Article suggests gradual implementation of the form, starting with online platform companies that facilitate the performance of services (such as driving, errands, or household tasks). Within that group of platform companies, this Article proposes that the rollout of a quarterly 1099 requirement start with ridesharing platforms only, extending to other service-based platforms later after evaluating the initial rollout. Additionally, only platforms of a certain size (measured by gross receipts) should be required to send quarterly 1099-ES Forms to workers; the requirement is not intended to burden small businesses who work with independent contractors.

This Section discusses who would be required to send a Form 1099-ES, which payees (taxpayers) would receive the form, how to calculate a simplified safe harbor payment, and then offers an example of implementation for ridesharing service platform workers.

1. Who Would Be Required to Send Form 1099-ES?

At the highest level, a Form 1099-ES would only be required of payers who already have an obligation to send an annual Form 1099 to one or more independent contractors. As discussed in Part I, independent contractors generally receive either Form 1099-K or Form 1099-MISC if they receive over $600 during the tax year from a payer.¹⁴⁸ A Form 1099-MISC would apply to an independent contractor payment not made through an online application—for example, if a business hired a painter and paid them by check.¹⁴⁹ However, this Article focuses exclusively on payers who qualify as TPSOs (such as online platform companies),¹⁵⁰ and thus focuses only on payers required to send a Form 1099-K. In excluding Form 1099-MISC, the Article’s focus is intentionally limited to payers who are already transacting with payees electronically and thus likely have the technological capacity to efficiently process and issue electronic quarterly information returns. Such focus also recognizes the reality that online platform work is a growing and significant segment of the economy that presents unique tax compliance challenges.¹⁵¹

Within the realm of Form 1099-K issuers, the proposal does not include credit card companies, which also have obligations to issue 1099-Ks.¹⁵² This is, again, because the quarterly 1099 proposal is intended to help online platform workers and similar individual taxpayers. The 1099-K requirements for credit card companies require the form to be issued to a broader range of businesses, for example, a large brick and mortar retail business that accepts credit cards, which are not the taxpayers targeted by the proposal.

Excluding Form 1099-MISC issuers and credit card companies, the Form 1099-K rules apply to payers who qualify as TPSOs, which include online platforms like Uber and Etsy, payment applications like Venmo and PayPal, as well as some cryptocurrency processors.¹⁵³ Within this group, only online platforms that pay independent contractors for services (like Uber or TaskRabbit) should initially be subject to a Form 1099-ES requirement.

While many independent contractors earn income online that is not service related, such as by selling goods using Venmo or Etsy, gross income from these transactions is less likely to be taxable. This is because only net earnings after deducting the cost of the goods sold are subject to income and self-employment tax,¹⁵⁴ and many online sales are likely made at little to no profit. Consider, for example, someone who sells their used furniture using eBay. Even though they will receive a Form 1099-K if the gross payments for the furniture exceed $600, the seller would not have any taxable income to report unless they sold the furniture for more than they purchased it for (an unlikely result for used furniture). Without any tax liability, they would have no obligation to make estimated tax payments with respect to the sales. On the other hand, taxpayers who are paid for services are more likely to have reportable net income, even if they are able to claim some business deductions.¹⁵⁵

To be sure, many sellers of goods earn a taxable profit. A seller who knits blankets and sells them on Etsy is likely to earn more than they spent on supplies. However, it is harder to distinguish between casual sellers (who may be selling used goods at a loss) and professional sellers by looking at the platform alone. A payment platform like Venmo might be used to make casual sales and professional sales; it also is often used for transactions that are not taxable at all, such as gifts. Thus, for administrative ease, this Article proposes initially excluding these platforms altogether from the quarterly Form 1099-ES requirement.

If implementing the requirement for service platforms is successful, the quarterly 1099-ES could be implemented down the road for platform workers who sell goods. To target professional sellers who are likely to be making a profit (and thus have taxable sales to report), the government could consider raising the payment threshold substantially beyond the current $600 for a Form 1099-K. Thus, for example, it might only require quarterly 1099s for sellers on these platforms who earn at least $10,000 of gross receipts in the year or $5,000 in a single quarter.¹⁵⁶

In limiting its focus to service-based platforms, the proposal would also initially exclude platforms that allow individuals to rent residential spaces online, such as Airbnb and VRBO. The reason for this exclusion is that the primary goal of the proposal is to ease compliance burdens on non-employee service providers, which is the group that has been singled out by the GAO and commentators as in particular need of assistance in meeting tax compliance obligations.¹⁵⁷ Further, many property owners earn rental income through platforms like Airbnb passively and are therefore not treated as independent contractors subject to self-employment tax.¹⁵⁸ Like online sales platforms, Congress could decide to gradually extend the 1099-ES requirement in the future to cover property rentals, but the proposal herein is more modest in scope to start. Accordingly, the remainder of the Article will focus only on service-based platforms.

To implement the proposal, Congress could enact a statutory requirement that any TPSO that pays an individual in connection with the performance of services by that individual be required to send a quarterly 1099-ES if a certain dollar threshold of payment is met.¹⁵⁹ TPSOs that pay individuals for performing services could include ridesharing platforms like Uber and Lyft, delivery platforms like Instacart and DoorDash, and other service-based platforms like Handy and TaskRabbit.¹⁶⁰ However, as discussed further below, this Article suggests that quarterly 1099s first apply only to ridesharing platforms like Uber and Lyft, with later extension to other types of services.¹⁶¹

While the proposal is targeted at large platform companies (such as those mentioned in the preceding paragraph), it is possible a much smaller business could technically meet the definition in the statute and be swept into the Form 1099-ES requirements. On one hand, a quarterly information return benefits an independent contractor regardless of who the payer is. However, whether a quarterly 1099 is cost-effective depends, in part, on whether the administrative cost imposed on the third party who must send the form is justified.

Imagine, for example, that an individual began operating their own ridesharing business through a new online platform, and that they worked locally with just a few drivers and generated only modest revenue. For such an individual operating at a small scale, the relative cost of sending a quarterly Form 1099-ES might be high compared to the tax compliance benefit on the payee’s side of the transaction (both in terms of time saved by the payee and revenue collected by the government). On the other hand, larger platform companies are more likely to already have the infrastructure in place to quickly compute and produce an electronic form with quarterly earnings and, due to economies of scale, can likely do so at relatively low cost.

To account for the potential of burdening smaller payers where the administrative cost would not be justified, Congress should consider requiring quarterly 1099s to be issued only by payers that exceed a minimum amount of revenue.¹⁶² For example, the rule might only require quarterly 1099s to be issued by payers who earn at least $500,000 in gross revenue during the year. This would surely capture larger platforms that can handle the obligation at little administrative cost while excluding truly “small” businesses that might be unduly burdened by the extra administrative requirement.

2. Setting the Payment Threshold

In terms of setting the dollar threshold for quarterly 1099s, the starting point should be the current threshold for Form 1099-K. Since TPSOs must send a Form 1099-K to any payee who is paid more than $600 during the year, at a minimum, the Form 1099-ES requirement should be triggered if a payee receives $600 in payments in a single quarter.

What if the payee receives less than $600 in a quarter but appears on track to receive $600 by the end of the year? One quarter of the $600 threshold is only $150, and it is questionable whether this amount justifies the administrative cost of an additional tax form (particularly given the criticism that the $600 threshold has never been adjusted for inflation).¹⁶³ Thus, as long as the 1099-K threshold remains at $600, the Form 1099-ES threshold should not be set any lower. This would mean that a payer has an obligation to send a quarterly 1099-ES to a payee in any quarter where the total cumulative payments for the year thus far exceed $600.

For example, suppose Driver A drives for Uber and is paid $300 between January 1 and March 31 and then is paid $400 between April 1 and May 31. Uber would not have an obligation to send Driver A a Form 1099-ES for the first payment period because Driver A would not have exceeded the $600 threshold. But Uber would have an obligation to send a Form 1099-ES for the second payment period, because Driver A would have been paid over $600 ($700, in this example) by that point. The 1099-ES would be for the second payment period, but it would reflect both the payments for that payment period ($400 in this example) and the year-to-date gross payments ($700 in this example). Uber would also have an obligation to send a Form 1099-ES for any remaining payment period in which Driver A was paid any amount.

In the likely event that Congress eventually raises the $600 threshold for 1099-K reporting, the Form 1099-ES threshold should also be revisited and might not track the 1099-K threshold as precisely. For example, a current bipartisan proposal would raise the 1099-K reporting threshold to $10,000.¹⁶⁴ In that case, the quarterly 1099-ES threshold might start at something lower and might be tied to the amount of quarterly payment in addition to cumulative payments. For example, Congress could impose a requirement that a Form 1099-ES be sent to any taxpayer who earns at least $5,000 in any single payment period or has earned $10,000 cumulatively by that payment period. If the taxpayer ultimately did not earn enough to meet the Form 1099-K threshold by the end of the year, the payer would not have to issue the Form 1099-K, but the payee would still have the benefit of the reminder and assistance in paying estimated taxes. (Note, the payee would still have an obligation to report and pay tax on any taxable income even if the annual 1099-K threshold was not met.)

Finally, it bears repeating that the obligation to send a Form 1099-ES for a payment period would only be an obligation to send the form to the payee, not the IRS. This could be done electronically at little cost to the payer. At the same time, the IRS would not be overburdened with more forms to process.

3. Calculating the Simplified Safe Harbor Payment

Form 1099-ES would not only report a worker’s gross payments for the quarter but should also contain clear and simple instructions for how to calculate and pay estimated taxes. As discussed in Section III.A, this means providing the taxpayer with: (1) the exact deadline for making the payment; (2) a link to make online payments (and an address to mail physical payments); and (3) a simplified safe harbor method of calculating the estimated tax due.¹⁶⁵ This Section considers how to calculate that safe harbor payment and proposes using a formula of 5% of the gross payments for that payment period.

Recall that the goal of the simplified safe harbor payment is to provide taxpayers the ability to easily calculate estimated tax payments without having to track down any other information beyond what is reflected on the Form 1099-ES. To achieve this, the safe harbor estimated tax payment would have to be based on the taxpayer’s current year tax liability, rather than the previous year’s liability (which would require consulting last year’s tax return). Thus, the goal of the safe harbor payment would be to determine an estimate of how much income and self-employment tax would be due on the gross payment reflected on the current Form 1099-ES.

Determining a precise amount of tax due on a gross payment for an independent contractor is difficult to do without more information. First, only taxable income, not gross income, is subject to income tax, meaning that a worker would have to reduce their gross income by any available business deductions as well as so-called “below the line deductions” (either the standard deduction or itemized personal deductions) to arrive at taxable income.¹⁶⁶ Second, only net business income, after factoring in business expenses, is subject to self-employment tax.¹⁶⁷ Third, many independent contractors can also claim a deduction under Code § 199A of up to 20% of their business income.¹⁶⁸ Finally, although self-employment tax is generally calculated at a fixed percentage (15.3%), a taxpayer’s income tax rate depends on how much taxable income they have for the year.¹⁶⁹

More simply, 1099 Forms reflect gross payments, but federal taxes are generally only due on net earnings from self-employment. Thus, to provide a simplified calculation of how much tax is due on a gross payment, a formula would need to make several simplifying assumptions to arrive at estimated net income and an estimated tax rate.

First, net business income must be derived from gross payments. In other words, the formula must make an assumption about what portion of a gross payment will be left over after business expenses are deducted. To do this, policymakers could look to public IRS data showing the average ratio of net income to gross receipts for particular industries. For example, IRS data on sole proprietors shows that the average profit ratio for workers engaged in driving services, including ridesharing services, is approximately 30%.¹⁷⁰ In other words, net income after deducting business expenses was about 30% of gross income, on average. Similarly, a study conducted by the Office of Tax Analysis at the Department of Treasury examined profit ratios for gig economy workers and found that, on average, gross profit ratios were approximately 30%.¹⁷¹

Accordingly, to calculate a simplified safe harbor payment for the purpose of implementing Form 1099-ES, policymakers could assume a profit ratio of 30%. Note, in certain service industries, profit ratios are likely much higher. Ideally, a different safe harbor calculation could be offered to different workers according to industry. Further research might yield better data on average profit ratios in various sectors of the gig economy. For now, this Article suggests limiting the quarterly 1099 proposal initially to ridesharing platforms, where the profit ratio is more well established by IRS data.¹⁷²

Presuming a profit ratio of 30% means the safe harbor formula would assume 30% of the gross payment reflected on a Form 1099-ES represents taxable income. The next step would be deciding upon a tax rate. Taxpayers are responsible for both income tax and self-employment tax when they make estimated tax payments.¹⁷³ Self-employment tax is fixed at approximately 15% of net earnings.¹⁷⁴ Individual income tax rates range from 10% to 37%, depending on taxable income.¹⁷⁵ But since average platform earnings tend not to exceed the income levels associated with higher brackets, this proposal focuses on income tax rates of 10, 12, and 22%,¹⁷⁶ and does not consider higher marginal rates.¹⁷⁷

Combining income tax rates with self-employment tax would result in a total federal tax rate ranging from 15% to 37%, as reflected in Table 4 below¹⁷⁸:

Table 4.
Taxable Incomea	Income Tax Rate	Self-Employment Tax Rate	Total Federal Tax Rate
$0	0	15%	15%
Up to $11,000	10%	15%	25%
Up to $44,725	12%	15%	27%
Up to $95,375	22%	15%	37%
Note: aIt should be noted that these are marginal tax rates, so for a taxpayer who is taxed in a higher bracket, the first dollars of their income are taxed at lower brackets, and only the amount over the dollar threshold is taxed at the highest bracket. Because the purpose of this discussion is to arrive at a rough estimate of how much to pay in quarterly taxes for purposes of the simplified safe harbor, the marginal nature of the tax brackets can be disregarded.

Recall that the proposal assumes a 30% profit ratio for platform workers earning income from ridesharing services—in other words, that net income equals 30% of gross receipts. Setting aside any other deductions (other than business deductions), this would mean that the total tax due on a gross payment could be calculated as approximately:

30% x (the gross payment) x (the total tax rate)¹⁷⁹

Using this formula, the tax due on gross receipts can be derived as a single percentage of the gross receipts, as reflected in the Table 5 below:

Table 5.
Taxable Income	Total Federal Tax Rate	Presumed Profit Percentage	Tax Due as a Percent of Gross Receiptsa
$0	15%	30%	4.5%
Up to $11,000	25%	30%	7.5%
Up to $44,725	27%	30%	8.1%
Up to $95,375	37%	30%	11.1%
Note: aCalculated as 30% times the total tax rate.

As shown above, the tax due on a gross payment would range from about 4% to about 11% of the payment, depending on the taxpayer’s overall taxable income. However, a number of factors which are difficult to generalize are relevant in determining which rate in the range is appropriate for a particular taxpayer. First, taxpayers may earn income from other sources beyond platform work, putting them in a higher income tax bracket than their Form 1099 suggests. Second, although the table above accounts for business expenses by assuming a 30% profit ratio, it does not account for any other deductions and thus likely overestimates tax liability for many taxpayers. Recall that taxpayers can claim the standard deduction or itemized deductions, and independent contractors can generally claim an additional below-the-line deduction under § 199A.¹⁸⁰ Other above-the-line deductions (such as retirement account contributions or student loan interest) also reduce taxable income for taxpayers.¹⁸¹ Finally, workers may be entitled to other tax credits (for example, a child tax credit) that further reduce their tax liability.¹⁸²

These factors, on balance, point towards erring on the lower side of the range of possible percentages of gross receipts. For this reason, this Article proposes 5%, which is a flat and easy-to-remember percentage at the low end of the range reflected in Table 5 above.¹⁸³ Although this Article proposes only one rate to start, policymakers could implement different rates for different industries or groups of platform workers. For example, workers in industries that are purely service based (for example, childcare) likely have far fewer business expenses than ridesharing service drivers, which means 5% of gross payments as an estimated tax payment would probably be too low.¹⁸⁴ For such workers, 10% of gross payments might make more sense as a safe harbor.

4. Examples: Ridesharing Service Platform Workers

This Section illustrates the estimated tax safe harbor proposal with concrete examples involving four rideshare drivers. For the sake of simplicity, all four drivers are assumed to be single, childless, and have no other income.¹⁸⁵ Additionally, the examples assume each driver claims business expenses, a § 199A deduction, and the standard deduction, and no additional deductions or credits.

Assume that the first driver, Driver A, receives gross payments from a ridesharing platform of $25,000 for the year. The distribution of those payments across the four payment periods is shown in Table 6.A below. After business expenses (including fees to the platform and the standard mileage deduction), assume that Driver A’s net income from platform work is $7,500.¹⁸⁶ Driver A’s actual tax liability would be $1,060.¹⁸⁷ Driver A’s estimated tax payments using the 5% safe harbor calculation would total $1,250. Thus, Driver A would overpay their taxes slightly and be entitled to a $190 refund, as illustrated in the table below.¹⁸⁸

Table 6.A. Driver A
	Gross Payment from Platform	Safe Harbor Estimated Tax Payment (5%)	Actual Year-End Tax Liabilitya	Amount Owed (Refund)
Period 1	$6,000	$300	. . .	. . .
Period 2	$5,000	$250	. . .	. . .
Period 3	$8,000	$400	. . .	. . .
Period 4	$6,000	$300	. . .	. . .
Total	$25,000	$1,250	$1,060	($190)
Note: aSee supra note 187.

Assume Driver B receives gross payments of $50,000 from the platform and nets $15,000 after expenses.¹⁸⁹ Driver B would pay $2,500 in taxes under the estimated tax safe harbor and have $2,126 of actual tax liability, resulting in a refund of $374, as illustrated in the table below.¹⁹⁰

Table 6.B. Driver B
	Gross Payment from Platform	Safe Harbor Estimated Tax Payment (5%)	Actual Year-End Tax Liabilitya	Amount Owed (Refund)
Period 1	$12,000	$600	. . .	. . .
Period 2	$13,000	$650	. . .	. . .
Period 3	$10,000	$500	. . .	. . .
Period 4	$15,000	$750	. . .	. . .
Total	$50,000	$2,500	$2,126	($374)
Note: aSee supra note 190.

Assume that Driver C receives gross payments of $75,000 from the platform and nets $22,500 after expenses.¹⁹¹ Driver C would pay $3,750 in taxes under the estimated tax safe harbor and have $3,744 of actual tax liability, resulting in a $6 refund.¹⁹²

Table 6.C. Driver C
	Gross Payment from Platform	Safe Harbor Estimated Tax Payment (5%)	Actual Year-End Tax Liabilitya	Amount Owed (Refund)
Period 1	$20,000	$1,000	. . .	. . .
Period 2	$15,000	$750	. . .	. . .
Period 3	$25,000	$1,250	. . .	. . .
Period 4	$15,000	$750	. . .	. . .
Total	$75,000	$3,750	$3,744	($6)
Note: aSee supra note 192.

Finally, assume Driver D receives gross payments of $100,000 from the platform and nets $30,000 after expenses.¹⁹³ Driver D would pay $5,000 in taxes under the estimated tax safe harbor and have $5,366 of actual tax liability, resulting an additional $366 of tax being due with their return.¹⁹⁴

Table 6.D. Driver D
	Gross Payment from Platform	Safe Harbor Estimated Tax Payment (5%)	Actual Year-End Tax Liabilitya	Amount Owed (Refund)
Period 1	$20,000	$1,000	. . .	. . .
Period 2	$35,000	$1,750	. . .	. . .
Period 3	$12,000	$600	. . .	. . .
Period 4	$33,000	$1,650	. . .	. . .
Total	$100,000	$5,000	$5,366	$366
Note: aSee supra note 194.

Several observations follow from these examples. Generally, workers with lower income will owe less in taxes than those with more income, so lower income workers are more likely to receive a refund if they use the safe harbor, while higher income workers are more likely to owe additional taxes. In the examples above, Drivers A and B (who have the lowest income) made overpayments through estimated taxes resulting in modest refunds. Driver C’s estimated tax payments matched their tax liability almost exactly, while Driver D (the highest earner) owed a modest amount in additional taxes.

Since Drivers A and B are more likely to face liquidity constraints (due to earning less income overall), it is ideal that, as between owing money and receiving a refund, they do not owe money with their tax return. In other words, Drivers A and B are less likely to be able to come up with additional cash for taxes owed when they file their return, so it is ideal they would slightly overpay, rather than underpay. Driver D, on the other hand, is in a better financial position to owe money with their return since they made significantly more money during the year.

In sum, while estimated tax payments are almost never going to match up exactly with a taxpayer’s year-end liability, the goal here is to minimize how much overpayment or underpayment the taxpayer will experience. If taxpayers are paying too much in estimated taxes during the year, even though they can claim a refund, they might be depriving themselves of much needed liquidity during the year. For taxpayers who do not pay enough in estimated taxes, even though the safe harbor formula would protect them from penalties, they may not budget properly for a significant payment due with their tax return. The 5% safe harbor proposed here aims to result in most low-income rideshare drivers receiving a modest refund, while higher earners may owe some additional taxes but would not pay estimated tax penalties.

C. Addressing Potential Objections

This Section addresses three potential objections to the proposal for quarterly 1099s. First, critics might argue that requiring certain businesses to send a Form 1099 every quarter would create too much cost or complexity for the business, for the IRS, or both. Second, critics might argue that there is too much heterogeneity among taxpayers to come up with a fixed formula for a safe harbor estimated tax payment. Third, critics might claim requiring platform workers to receive more frequent tax statements would impose unfair burdens on these workers.

1. Quarterly 1099s Would Impose Undue Complexity and Cost

History has shown that, when Congress expands tax reporting obligations of third parties (such as through expanded 1099 requirements), those third parties generally oppose the change.¹⁹⁵ This is to be expected because it is the third parties who bear the administrative cost of obligations like issuing 1099s. Third parties may also be concerned that tax reporting obligations will make their customers reluctant to do business with them.¹⁹⁶ Thus, if Congress were to implement a new requirement for quarterly 1099s for platform workers, it is possible (if not likely) that the platforms would oppose the rule and claim it is unduly burdensome.

There are several responses to this claim that quarterly 1099s would pose undue burdens on the platform companies. First, the quarterly 1099 requirement would only apply to platforms already required to issue a Form 1099-K to the worker. This means that the IRS is already receiving information about the worker’s earnings. Thus, quarterly 1099s should not discourage workers from doing business with the platform because the IRS is not receiving any new or additional information. Rather, the quarterly 1099 is only for the worker’s benefit. In essence, the quarterly 1099 is a form of free tax assistance from the platform to the worker.

Second, while sending quarterly 1099s to workers will impose additional administrative costs on the platform, that cost will be minor. Particularly, the marginal cost of tracking earnings each quarter is relatively low since the platform already has an obligation to engage in year-end information reporting under the 1099-K rules. This means that additional administrative steps required for 1099-Ks, such as asking taxpayers to provide taxpayer identification numbers, will already be in place.¹⁹⁷ The platform companies also likely already have the necessary technology in place to send tax forms electronically to their workers. Since the quarterly forms only go to the workers, the platforms companies will have no additional filing obligations with the IRS.

Further, it should be noted that imposing some administrative costs on third parties is both efficient and foundational to our tax system. For example, withholding imposes administrative costs on employers, but it is more efficient to have taxes collected and paid by the employer than to impose payment obligations on each employee.¹⁹⁸ Withholding also results in higher tax compliance and more revenue collected.¹⁹⁹ Similarly, third-party information reporting in all areas, from investment income to broker transactions to independent contractor payments, is justified by the higher compliance it brings.²⁰⁰

The same reasoning applies to quarterly 1099s. The tradeoff for the minor cost it would impose on third parties (who can afford to bear it) is reduced administrative cost and higher compliance for the platform workers. In other words, the modest cost to the platform of additional communications to the taxpayer throughout the year should be outweighed by the benefit to the taxpayer of receiving a report of earnings with a reminder and instructions for how to pay estimated taxes.

Another related argument against the proposal might be that the IRS would also be unduly burdened by more 1099 forms, but this argument is misguided. Recall that the quarterly 1099-ES would be an obligation of the platform company to send to the worker, but not to the IRS. The IRS would receive a copy of the taxpayer’s Form 1099-K at the end of the year as under the current system, but the IRS would not receive quarterly information. Thus, there would be no additional returns for the IRS to process as a result of a quarterly 1099 requirement.

Quarterly 1099s would pose a minor administrative burden on the IRS in that the requirement would have to be policed in some way. Presumably, Congress could impose a penalty on businesses that fail to issue required 1099-ES forms to taxpayers in the same way that it imposes penalties for failure to file year-end information returns.²⁰¹ To enforce these rules, the IRS would need to monitor compliance through audits. However, this is already the case for enforcing the expanded 1099-K rules, so verifying compliance with quarterly reporting should not impose significant additional enforcement costs on the IRS.

Finally, it is worth noting that advances in technology have justified expansions to information reporting rules in recent years. As tax information is digitized and easily shared online, it is less costly to require third parties to issue 1099s, which means less political resistance and a greater net benefit to increasing 1099 reporting. These same technological advancements that have justified expanding the pool of 1099 recipients justify providing taxpayers with more frequent, and therefore more helpful, tax information.

2. The Safe Harbor Calculation Would Be Inaccurate

Critics of the 1099-ES proposal might also argue that it is too difficult to provide workers with a simple method of calculating their estimated taxes because each taxpayer’s situation is different. Those critics might further argue that the formulaic safe harbor proposed in this Article (5% of gross receipts) will result in underpayments or overpayments in too many cases.

It is certainly true that the simplified safe harbor formula for estimated tax payments—5% of the gross payment—relies on assumptions that will turn out not to be true for all taxpayers. For example, it assumes very few non-business deductions, and it assumes a 30% profit ratio that may be too high or too low for some workers.

But it is important to keep in mind that the 5% safe harbor is not intended to substitute for calculation of taxpayers’ actual tax liability. That is the function of Form 1040, the annual Individual Income Tax Return. The safe harbor is merely meant to be a simple way to give taxpayers some basis for making estimated tax payments. In this respect, it is not unlike the statutory rule that allows taxpayers to avoid estimated tax penalties by paying at least 100% of their prior year’s tax liability in estimated taxes.²⁰² In many cases, basing estimated tax payments on last year’s tax liability will result in significant underpayment or overpayment of estimated taxes; this will be true whenever the taxpayer’s current income is significantly different than the prior year’s income. (It will also be true if the taxpayer has a different tax situation from the prior year due to a change in marital status, dependents, deductions, or credits.) However, Congress has a made a rational decision to allow taxpayers to use last year’s tax liability as a reasonable basis to estimate taxes for the purpose of avoiding penalties. The 5% formula would have the same function.

Furthermore, the simplified safe harbor adds an alternative that is meant to better estimate the current year’s tax liability based on current earnings. This not only allows taxpayers to make payments without having to find last year’s tax return, but it also is more likely to help taxpayers avoid owing significant tax with their year-end tax return that they might not have budgeted for.

Further, using a fixed percentage of gross payments as a starting point, such as the 5% proposed in this Article, makes it much easier for taxpayers to make individualized adjustments to reflect their tax situation. For example, if a platform worker makes estimated payments based on 5% of their gross payments but ends up owing $1,000 with their tax return, they might decide to adjust the payments to 6% the following year. If they still owe money and prefer a refund, they might upward adjust to 7% the next year, and so on, until they are happy with their year-end tax situation. Relating estimated tax payments to a fixed percentage of gross payments gives taxpayers a better understanding of how their taxes relate to their earnings and more agency over the process of paying estimated taxes.

3. Quarterly 1099s Would Be Unfair to Low Income Workers

Finally, in the wake of the recent expansion of the 1099-K rules to cover more online transactions, some politicians and interest groups have claimed the rules imposed an unfair tax on low-income workers. For example, Senator Rick Scott released the following statement:

President Biden claims he won’t raise taxes on anyone making less than $400,000, but that’s a lie – he’s already done it. Along with trillions in unnecessary and unrelated in spending in the American Rescue Plan, Biden inserted a tax increase on gig workers, like hardworking Americans that work as drivers for Uber, Lyft or DoorDash.²⁰³

Similarly, the Coalition for 1099-K Fairness warned the new requirements would create “new IRS paperwork burdens” for small businesses.²⁰⁴ These same politicians and interest groups would likely repeat these arguments in response to the proposal for quarterly 1099s.

On one hand, the critique that more tax information is unfair to taxpayers themselves, particularly that it imposes a tax increase on them, is the easiest of all to address because it is based on a fallacious premise. However, because the argument is largely rhetorical, it may be the most pernicious.

Importantly, changes to information reporting rules are not changes to substantive tax law, so they cannot be correctly described as imposing a new tax or a tax increase. It has always been the case that platform income is subject to tax.²⁰⁵ The previous $20,000 threshold for receiving a 1099-K was not a rule that exempted transactions under $20,000 from income and self-employment tax. The rule simply triggered an obligation on the payer to send a Form 1099-K. It has always been the case that taxpayers are supposed to track and report earnings under the 1099 threshold.²⁰⁶ (Whether they do so is another story, but willfully failing to do so is tax evasion.²⁰⁷)

Although it might be politically persuasive to advocate leaving platform workers alone when it comes to their taxes, there is no valid reason that providing them with more information and with simplified instructions on how to pay their taxes is harmful. The only reason to withhold such information would be to give taxpayers a plausible basis for not paying their taxes.

There has been one line of critique about taxpayer burden that has merit, which is that the new 1099-K rules may be overbroad and cause confusion and anxiety for taxpayers (like sellers of used goods) who do not owe any tax.²⁰⁸ It is for this reason that the proposal in this Article does not cover sellers of goods but instead is aimed only at industries (like ridesharing services) that have an established history of earning taxable income. If, in the future, Congress decides to more narrowly tailor the 1099-K reporting rules to certain industries or income thresholds, Form 1099-ES could track these changes. In other words, the goal of quarterly 1099 reporting would always be to provide regular information to taxpayers that owe taxes and not to send needless forms to taxpayers who do not have estimated tax payment obligations.

CONCLUSION

Paying one’s taxes correctly and on time is exceptionally hard, especially for independent contractors. With the exception of employee withholding, our current tax system does very little to make paying federal taxes easy for people. Yet, the threat of punishment for getting it wrong looms large in many taxpayers’ minds. Perhaps nowhere is this sentiment better captured than in a 2020 viral TikTok video about paying taxes, which has earned over 2.2 million likes to date.²⁰⁹ The video is a parody of an interaction between a young taxpayer and an IRS agent, with the following dialogue:

Taxpayer: Hi, I’m 18 years old. This is my first time paying taxes. I really don’t know what I’m doing. Can you tell me how much I owe and I’ll just pay it?

IRS: No, we can’t do that. You have to figure out that amount for yourself.

Taxpayer: Oh, ok. If I’m just a little bit off in the amount that I owe, it’ll be ok because it’s my first time, right?

IRS: Oh no, we already know how much you owe, exactly, I mean, down to the penny, but you still have to figure that out for yourself.

Taxpayer: Well, what if I get that amount wrong?

IRS: You go to federal prison.

The post is humorous because of the truth that underlies it.²¹⁰ It portrays a system that borders on absurd: we expect compliance and accuracy from taxpayers, with the threat of punishment for noncompliance, with virtually no help from the government with getting it right.

This Article focuses on one of the most confusing yet important obligations for platform workers and other independent contractors: figuring out how and when to pay their estimated taxes. The proposal for quarterly 1099s is not a panacea, but it could go a long way towards helping taxpayers budget for taxes, calculate an estimated payment, and make their payments on time.

More importantly, although the proposal is modest in scope, it is also a call to policymakers to rethink the role of third-party tax information more broadly. While deterrence and monitoring taxpayers will always be crucial aspects of tax enforcement, tax information can also empower taxpayers. In this respect, third-party information returns should be thought of as sending an informational nudge to the taxpayer, rather than just reporting information to the IRS. Just as monthly bills help customers pay for services, quarterly 1099s would help taxpayers calculate and stay on top of quarterly tax payment obligations. This reform would not only raise revenue, but it would also be a much-needed step towards simplifying and demystifying the tax system for individual taxpayers.

97 S. Cal. L. Rev. 1527

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Kathleen DeLaney Thomas*

* Aubrey L. Brooks Distinguished Professor of Law, University of North Carolina School of Law. I am grateful to Leigh Osofsky and Courtney Thomas for helpful feedback on this Article.