Sex Work and Taxes

Mel: Let's start with the elephant in the room. For so many in this industry, there's a real fear of the IRS. This feeling that if you engage with the tax system, you're asking for trouble and inviting the fed into your life. But I think that’s the wrong way to think about it. Can you explain why even if your job is grey or black market, filing taxes isn't increasing your risk but actually potentially lowering it.

TaxxxWork: I always tell people that the government nailed Al Capone for tax fraud, of all things, because that was the easiest route to get him into jail. That’s not to say that all people who do not file taxes are going to jail but moreso that tax noncompliance is easy to establish. Additionally, the IRS has very broad powers when it comes to estimating your income for you and they never do so in your favor. The easiest way to avoid this situation is to simply file taxes.

Whether sex work is your main job or your side job, by filing taxes you shift the burden of proof on to the government re: whether you paid the correct amount of tax for any given year. When you file, the government has a much steeper hill to climb in trying to come after you and that serves to protect you. In this way, you are lowering your risk of the government ever paying any attention to you.

Mel: Beyond the obvious "it's the law," and “we live in a society” what are the tangible, personal benefits of paying taxes? I'm talking about the things that directly improve their life. What doors can being a compliant taxpayer open for them?

TaxxxWork: I often have this conversation in civvie and SW tax circles. Tax compliance is a pain in the ass but it serves to give you access to many legitimate avenues of improving your life.

A small sampling includes: rental applications may ask for tax forms; mortgages and business loans basically require tax compliance; if you file your taxes you can set up retirement savings through your business (even if it is tiny!); the meals, miles driven, and supplies you use for your spicy work can be deductible; you can get access to cheaper healthcare; if you are in a situation where your income is lower (even for a short period) tax compliance can open up opportunities for free money form the government in the form of tax credits, food, healthcare, college or private school scholarships and grants, and access to social services.

There are SO MANY ways that filing taxes can improve your life.

Mel: Imagine you're talking to someone who knows absolutely nothing about taxes. They've been working for cash that they keep in a shoebox under their bed, and they have no idea where to start. Walk me through the very first steps they should take to get right.

TaxxxWork: I would honestly start by telling them to open a business bank account at a local credit union. This way they avoid big bank fees and big bank scrutiny. The reason I would go with this as a first step is that when I have a big wad of cash staring at me, I will spend it. Some of it on needs, much of it on wants.

With a business bank account, it gives you a bit of a buffer to spending the pile of cash. Once you take that step, it gives you a pathway to being more intentional with the money that you earn. Worst case, at least this bank account can serve as a way to track expenses. I can’t tell you the thousands of dollars people have uncovered as business expenses when they moved their money to a bank.

From there, I would encourage them to track their business spending. Sure, a bunch of it may go to boring, real-life stuff but once you are intentional about tracking where money goes, that also helps uncover business expenses.

Also DO NOT pay for QuickBooks until you are forced to by your business size or your accountant/bookkeeper. For people starting off, I would suggest an excel spreadsheet or a free/low cost expense tracking app. From there, it is much easier to prepare to file taxes.

Mel: That's a great point about QuickBooks. When I handled things myself, I used GnuCash which is an open source solution. I found it to be very straight forward and easy to use.

So, for someone who is multiple years behind, what do they do to get right? People think once they miss a year “the jig is up” and then they stop filing altogether and the problem snowballs. What is the best way to remedy that situation before another year goes by?

TaxxxWork: One of the primary areas of focus in my tax practice is called representation or tax controversy. This is when I help people who are behind in filing/paying their taxes but want to get compliant or they got a letter from the IRS/State taxing agency and need help with a response.

Let me point back to what I said up top: it is always better to file your taxes. Especially if you are fewer than 3 years behind, you might be giving up access to valuable “free money” from the government or even a refund from any W-2 work. If you are more than three years behind then it is best to talk to SOMEBODY (hopefully not someone you hear about on the radio) and strategize which tax years to file.

After 3 years have passed, sometimes it is better to let sleeping dogs lie but these things must be evaluated on a case-by-case basis. These services are not cheap though, so potential clients also have to weigh the costs of various levels of help vs the tax savings

A good tax pro should be honest with you about what you can do for yourself vs with their help and the potential costs/consequences of each option.

Mel: Let's talk audits. There’s a lot of information out there about what does and doesn’t trigger an audit. I’ve seen things saying that most audits are on the lowest earners because they can use fresh graduates vs skilled tax lawyers. Even if you do everything by the letter and will come out clean, an audit can make your life hell in the meantime. So what are the steps someone can take to avoid risking an audit.

TaxxxWork: The audit process and the way people are chosen for audit is somewhat opaque, especially when it comes to the grey area stuff. Yes, the IRS goes after the “low hanging fruit” with correspondence audits regularly.

Correspondence audit mean they send you a letter. This happens because so many people self-prepare, make mistakes that are easily caught, and then owe tax, penalties, and interest. Correspondence audits make up over 50% of audits out there. However, it is important to know that fewer than .35% of tax returns get audited and I expect that number to dip lower as this administration guts IRS enforcement.

As far as how to avoid audits I would first advise that you don’t do anything really stupid. No one is going to believe that you have a virtual consulting practice that has 75% of it’s expenses coming from meals & travel. No one will believe that a freelance artists uses their car 100% for business. Don’t make up 9 random numbers for an SSN and try to claim your dog as a dependent.

Aside from that, I would advise getting help from a professional to understand the ratios of allowable expenses in different professions. There is a bit of an art to this but sometimes the “magic number” is a easy as choosing the correct business code (also called NAICS or SIC codes) to avoid certain types of scrutiny.

Finally, don’t make up numbers if the IRS gets information on a certain item. For example, don’t intentionally under report 1099 income. If you get $15k of 1099s, don’t say you got $7k. If you only withheld $500 on your W-2, don’t report $3000 of withholdings. Don’t intentionally omit the amount that you took out of your old IRA but don’t want to pay the penalty on. These are the easiest picking for the IRS and invite additional scrutiny.

If you absolutely know you will not be able to afford your tax bill, file, then enter into a payment plan. The IRS will give you up to 5 years to pay off most balances and will make arrangements for large balances. I can help with this as well if this your situation.

I can also talk about three ways in which people get chosen for an audit:

• The first is what I call the Unlucky Lottery audit. The IRS is constantly tweaking their review processes and sometimes they will choose a random taxpayer and ask them to substantiate a portion of their tax forms. This is EXCEPTIONALLY rare but does happen. You will know this is you if the IRS chooses some innocuous portion of your tax filing (like, your W-2 income, address, SSN) and asks you to substantiate it by sending in proof that it was correct on your tax form. There is literally nothing you can do to avoid these but they are usually very easy to respond to, and most people can do them without assistance.

• The next way people get audited is a good old correspondence audit. Most people have gotten one of these at some point. This is where the IRS sends you a letter and says “Hey, we found something on your tax return that we disagree with.” They will tell you what part of your tax return the difference stems from, how much the difference was, and ask you to pay up if you agree with their changes or send in proof that they are wrong. You can sometimes handle these without professional help.

For example, if you forgot to include a W-2 or 1099 income, and the number that the IRS found matches what you have in your records then you can just pay your tax difference and penalty and the matter is closed. However, I must say that the IRS & State taxing agencies are OFTEN wrong in these matters and they never, NEVER give you the benefit of any credits you have coming to you in these instances. If in doubt, it is almost always worth talking to a pro like me when this happens because they may be able to help you lower or eliminate any taxes & penalties.

• Finally, the big scary audits are when the IRS/State definitely has something on you and are hoping to have their “Gotcha!” moment. These are almost always letters as well and they will say something like “Dear So-and-so, we have reason to believe that [a particular part of your tax form] is incorrect. Please provide us with substantiation for it.”

They won’t tell you what info they have that establishes their position nor will they tell you the amount of difference. If you get one of these letters, definitely pay for help. Not doing so can be very costly in additional tax, penalties, and examination of other parts of your life.

Mel: I wanted to give other members of the community a chance to have a voice in this, so we have a few questions from sex workers on Reddit. First:

"Can we file on TurboTax? Is it complicated to file for income made in at least 4 other states? Is this doable myself? Do I need an LLC? What’s the best way to do it?"

and expanding on this, do you think that DIY is possible or advisable for the average sex worker? I DIYed my taxes for six years successfully before I felt the need to hire someone but I was very relieved once I did and I couldn’t imagine anything else.

TaxxxWork: There are some distinct questions here that require separate answers

RE: Filing on TurboTax: Absolutely! I don’t love TurboTax because I always say that it is only as good as the programmer’s ability to translate the complex tax questions into words most people will understand. However, this is a cheap and easy solution for many people. I am always happy to tell people that they can file on Turbotax and avoid paying me if it fits their situation.

RE: Multi State filings: Yes, this is complicated almost everywhere (DC Metro, CA/NV, NY, OH, PA…I am looking at you.) The toughest part here is allocating income correctly and making sure that you are not paying taxes twice on the same income. Many states allow for you to exclude income that you have already paid tax on elsewhere…but not all. Also, some states tack on city-level taxes that can come into play if you live in one area and work in another. If someone knows they need to file in multiple states, they are definitely candidates for professional help.

No one needs an LLC. The two reasons to form an LLC (or any entity) is either asset protection or tax protection. I can talk people through both as well as help them establish best practices to maintain their entity’s status. I can even help them form the entity themselves if they really need that.

I think most sex workers do need some professional help because they are all, on some level, self-employed. There are lots of opportunities but also landmines in the self-employed arena. Companions especially must walk a really fine line but everyone from dancers to creators would benefit from professional help. Mainly because tax law is complex, ever changing, and there is lots of terrible information out there.

Mel: Another community question was about maximizing deductions. I would like you to talk about that but I would love to first take this opportunity to clear up some myths about deductions, if we could. Just because you’re the product doesn’t mean you can claim everything necessary to keep you alive and pretty.

A lot of providers believe that you can write off all of the following: Makeup, lingerie, high heels, dresses, skincare, facials, waxes, massages, condoms, hotels, flights, plastic surgery, face lifts, acupuncture, Botox, filler, lip filler, eyelash extensions, hair extensions, nails, STI testing, prophylactic STI medication (PeP, PreP), STI suppressants (Valtrex), condoms, lubricant, and sex toys.

Now, lets talk about reality.

TaxxxWork: I could write an entire book on just this topic. It is one that I am well-versed in and will vigorously defend my clients for. First, the “write off everything” myth is exactly that…a myth. The biggest reason this myth persists is that IRS enforcement has been hamstrung for years (decades?) and everyone knows someone who “does it and hasn’t gotten caught.” The hasn’t gotten caught part is key here. Even if they have not gotten caught, it is simply a matter of time.

What they are doing is still lying to the IRS and if it works once, people will get progressively bolder. That’s when the IRS finds out and you’re up a creek. While I will aggressively defend my client’s rights to deduct what they can, here is a partial list of things that would not be deductible under average circumstances:

§ Hair styling
§ Make up
§ Skincare
§ Gyms
§ Most clothing
§ Medication
§ Nails
§ Massages
§ Groceries
§ Pet/Pet supplies

However, I am confident I could defend expenses for toys, lube/condoms, some travel, some home/apt space, incalls, talent, some types of hair/makeup, some medications, subscriptions for researching the competition and those sorts of things.

The IRS standard for business expenses of any sort is whether they are, first, ordinary and necessary in the course of a person’s business. There is established precedent for how to arrive at this for performers and artists in many arenas that I can help tap in to.

Also, even if something is not deductible, there are ways to get the benefit of something while still getting some tax benefit. Gyms, wellness...all of these things can be paid benefits for certain people and although these benefits are taxable, they can still amount to tax savings.

This deep knowledge of the ins and outs of expenses is where I think I really shine and where some people can fall into a trap. Taking too much opens you up to questions. Taking too little means paying more taxes.

Mel: Another Redditor asks: "What are quarterly taxes? Should you pay them even if you end up breaking even every year? Who should and shouldn’t pay them? And how do you figure out how much to pay if you are someone who needs to pay them."

TaxxxWork: Estimated tax payments, AKA quarterly taxes, are the government’s way of making sure they aren’t left holding an empty bag at the end of the year. All taxing agencies expect you to contribute some money against your tax liability over the course of the year.

This is because these agencies know that if they presented people with a large bill in January every year for the previous year, they’d get stiffed often. W-2 employees do these payments on every paycheck. Many self-employed people do not have paychecks with withholding so they are expected to make periodic estimated tax payments. If you are generally even or get a refund at tax time, you are basically OK not making estimated payments.

Beware though if your spouse’s paycheck is the reason you break even/get a refund every year you could get a surprise if their employment situation or your relationship situation changes.

Mel: Our last Reddit question simply wants to know the pros and cons of both LLC and S-Corp

TaxxxWork:

LLC Pros

• Some anonymity by using registered agents.
• Some asset protection
• Very easy to set up. Fairly easy to maintain

LLC Cons

• Little to no tax savings in almost all cases
• Most need to be “re-registered” every year
• Are subject to state-level scrutiny

S-Corp Pros

• Generally offer tax savings
• Allow for use of distributions
• Corp benefits with relative ease

S-Corp Cons

• Definitely more admin work than an LLC or sole prop
• Administrative hurdles are strict
• Strict rules for setting one up
• Can sometime be taxed extra at the State/City level

Any entity consideration should begin by speaking with an experienced professional. If their suggestions seem too good to be true, they probably are. I love having this talk with people and recommend them places to help them get set up. I am happy to talk them through HOW to form an entity and what they need when forming one as well as what to look out for. This includes how to stay relatively anonymous.

The entity discussion is one of my favorite tax topics, actually.

Mel: How do you document income when a lot of it is cash? What's the best habit they can build today to make tax time next year a thousand times easier for you as a preparer and them as a business owner.

TaxxxWork: A lot of this depends on how organized and computer savvy you are. Honestly, the easiest way to document large amounts of cash is to have a business bank account. Even if you are a disorganized mess this can help you track income. If you are more computer savvy, I can offer up a spreadsheet to help track business income and expenses. If you are doing well financially, you can hire this out. If you are regularly in the habit of (or could be in the habit of) depositing more than $6,000 a week then we should talk.

The best habit any of my business owners can pick up to make my and their lives easier is not commingling their personal and business money. Deposit income into your business account. If you want to take it out, transfer it to your personal account. Only use your business bank and credit accounts for business stuff. Always, every time, forever and ever. Amen.

Mel: Amen indeed.

Let's talk about sugar income — both allowance and PPM (pay per meet). There are frequent arguments over it being a gift, but that’s really just so the men can pretend they’re not paying women for their company. I’m of the belief it’s taxable income that should be reported.

What are your thoughts on sugar income?

TaxxxWork: Sugar income is 100% income. Some people will try to tell you that they are not performing services for their sugar income.

Unless they can prove to me that they are 100% free from any obligation in connection to their sugar money it is income.

I will die on this hill.

Mel: This has been a lot of really great information. How about to wrap up, you tell us a little about yourself and your background. Why you’ve decided to provide services to adult workers specifically. A lot people see us as an easy mark and dead money waiting to be swept up. Obviously I don’t think that’s you, or this wouldn’t be happening. So, why us? And do you offer any sort of payment flexibility for low income workers?

TaxxxWork: I got into taxes as a Latino guy because in my early roles a as business consultant and bookkeeper, I very often saw my Latino business owners get awful tax advice and bad service from their tax/insurance/financial planning/vacation sales people. Those sorts of situations irked me and when I was talking to one client’s tax person, he suggested I look in to tax as a career because he thought I would do well in it. Well, he was right!

Tax gives me a good balance of allowing me to be totally nerdy and helping people that really light my fire. I started working with SWs because my first tax job was at a large national chain that has a presence in Walmart. One day a woman sat down at my desk and asked if I could help her with her “stripper money.” I could, I did, and she referred me to a couple of friends. I just went from there.

At the end of the day I see my SW clients much in the same way I saw my Latino clients…a vulnerable population that people love to take advantage of. I think that’s BS and want to provide quality advice and save them some money.

Along those lines, I always schedule a complimentary phone/Zoom consultation where I give people clear answers about whether I am a good fit, what I see their price tag being, timelines, etc. Then they can decide whether they want to work with me or not.

I generally take 30% up from to get people into my queue and they can pay me the remaining 70% as they see fit. However I do not do trades and I don’t file forms until I am paid up. I find that’s the best way to keep things clean and so that no one gets taken advantage of.

If my price is genuinely an obstacle for someone, I am always willing to have a conversation with people.