A tax preparer “sympathetic to sex workers” sent in the following suggestions for people who make their living in the skin trade. This is for informational purposes only and does not constitute an attorney-client relationship.
“I am not a sex worker, just sympathetic to the cause, but I am a tax preparer with several years’ experience and have some things to add to your document.
A person with a source of income s/he doesn’t want to disclose, but who
wishes to file a tax return to remain legal with the IRS, should first decide
how to categorize the income; there are three choices.1) Wages (line 7 of form 1040). This is what applies to people who have an employer who pays them regularly. For sex workers I wouldn’t recommend this unless your employer has a similar desire to stay legal with the IRS, since if the employer doesn’t withhold taxes, you’re going to have to explain the lack of a W-2 which will result in the employer getting busted. On the other hand, if your employer does withhold taxes, it shouldn’t cause any trouble for him/her provided that something vague like “entertainer” or “consulting services” is filled in as your occupation.
2) Self-employment (schedule C). This applies to people who perform an activity as a regular source of income, with no one regular employer.
Here the issue of self-incrimination raised by the original article is probably not a problem, depending on how vague you’re willing to be about what you do.
3) Hobby income (use the “other income” line near the bottom of page 1 of form 1040 and write “hobby income” on the explanation line).
Officially, the difference between “self-employment” and a “hobby” is whether you do it primarily for the purpose of earning money. Practically, the differences are these:
a) In self-employment you can deduct all expenses on schedule C. In a hobby you deduct them in the “misc work-related expenses” section of schedule A, where they are subject to a “floor” equal to 2% of adjusted gross income.
b) You don’t have to pay self-employment tax on hobby income. (But you won’t get credit for it at retirement time either.)
c) Hobby income doesn’t count as “earned income” for the earned income credit.
The IRS has a list of criteria it uses to try to figure out whether an activity is a hobby or real self-employment, because a lot of people try to pass off hobbies as self-employment in order to deduct all their expenses. (For this reason, a self-employed person is more likely to get audited than someone with hobby income.) For instance, did you make a profit in most of the last 5 years?
Do you have separate bank accounts for your business? Does it have a business license? Do you regularly spend your “work day” there?
So unless you really need the Earned Income Credit, I suggest treating your sex work as a hobby and reporting hobby income. It may cost you a little on your tax return, but you’ll be legal with the IRS and save a lot of headaches too.”
Previously: Sex and Taxes; Italy passes porn tax, gestures emphatically
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