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For example, if you had an education startup that took, as payment, a contract from each student that they would pay an amount equal to 1% of their income tax to the education company each year. Would this be a legal arrangement, and would it be possible to arrange with an entity like the IRS to assist with these transactions?

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    One consideration is that the payment obligation might be wiped out if the student declares bankruptcy. I don't know whether calling it a "contract" instead of a "loan" would avoid this but I doubt it.
    – Nate Eldredge
    Commented Jan 8, 2018 at 6:03
  • @Nate: Not alone, it wouldn't. Bankruptcy includes contracts too, and every loan involves a contract anyway, so you gain nothing.
    – cHao
    Commented Jan 8, 2018 at 12:45

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Is it legal? Yes. You can make just about any payment arrangements you like.

You wouldn't be able to verify compliance, though, without some connection to the student's employer. The IRS won't tell you how much money a third party earned, or how much tax they paid, in a given year. Pretty sure they can't provide that info, which is why companies wanting to verify your income ask for copies of your tax returns rather than permission to get those returns.

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    You could include such verification as part of your payment contract
    – Viktor
    Commented Jan 8, 2018 at 3:25
  • You could, but you wouldn't be able to verify the accuracy or completeness of whatever info the student provides. If someone has two jobs but only gives you one W-2, you wouldn't know about the other job.
    – cHao
    Commented Jan 8, 2018 at 3:33
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    yeah I mean at some point it does become fraud
    – Viktor
    Commented Jan 8, 2018 at 3:33
  • Well, yeah. But if you're dealing with money, and basing it on taxes, you're probably not going to want the risk that inheres in "yeah, this is how much tax i paid, honest". You're going to want a way to verify that info.
    – cHao
    Commented Jan 8, 2018 at 3:43
  • "If someone has two jobs but only gives you one W-2, you wouldn't know about the other job": that is why the contract should call for the provision of tax returns for the purpose of income verification, just as you note "companies wanting to verify your income" do. Lots of people don't have any W-2 forms, after all.
    – phoog
    Commented Jan 8, 2018 at 4:07

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