The current system of quarterly individual estimated tax payments poses significant challenges for taxpayers, particularly those in the gig economy. Recently, a group from the California Lawyers Association Taxation Section proposed changes to the IRS to try to address some of the issues in the existing estimated tax system.

Current System and Its Problems

Taxpayers with income not subject to withholding must make quarterly estimated tax payments.

• The number of people failing to make these payments has increased significantly, from 7.2 million in 2010 to 14.2 million in 2022.

Key issues include:

1. The first deposit coinciding with the previous year's tax payment
2. Irregular payment schedule (April 15, June 15, September 15, January 15)
3. Quarterly payments being less intuitive than monthly ones
4. High combined tax rates for self-employed individuals (often exceeding 25%)

Proposed Solutions

1. Automated Direct Debit Payments: Similar to installment agreements for past-due taxes, taxpayers can set up automatic monthly payments.
2. Payroll Withholding for Sole Proprietors: Enable self-employed individuals to use payroll services for income and self-employment tax withholding.
3. Monthly Vouchers: Replace quarterly Form 1040-ES vouchers with monthly versions, making them more manageable and likely to be used consistently.
4. Source Withholding from Large Businesses: Offer optional source withholding for self-employed taxpayers working with large companies like Uber and Lyft.

Benefits of Proposed Changes

• Align with existing IRS collection methods
• Reduce psychological and structural burdens on taxpayers
• Increase likelihood of consistent tax payments
• Minimize the risk of large year-end tax bills
• Potentially increase overall tax compliance and collections

Implementing these changes has the potential to significantly simplify the estimated tax payment process, making it easier for taxpayers to comply and potentially increasing overall tax collections. It’s unknown how seriously the IRS will consider these recommendations. However, one thing is clear: compliance with estimated tax payments is not improving on its own.