[Editor’s note: Welcome to the Underground Economy series, which delves into the business of illicit, under-the-table, or otherwise accepted-but-not-quite industries. Today’s installment deals with the sex worker industry!]
When it comes to the sex worker industry, facts and statistics can be difficult to find. For one thing, the industry involves a diverse set of individuals. Some pursue sex work voluntarily while others are coerced or trafficked. Similarly, the actual type of sex work varies as well, including phone sex workers as well as prostitutes. But no matter the situation, sex worker tax evasion has been identified as a potential national issue. Sex worker tax risks exist regardless of whether they choose to file or not. And both sets of risks influence the ultimate choice sex workers make regarding their taxes.
Though precise data is lacking concerning this type of work, the sex worker industry has been estimated to draw $15 billion annually. That’s a sizable amount, and one that’s worth noting if sex worker tax evasion is a common practice. For this reason, social media groups have threatened reporting sex workers for the practice. Similarly, the IRS has raised the stakes against sex workers who fail to report their income. But whether this has been enough to persuade the vast majority to legally abide with existing tax laws remains unknown. The following explores this issue further as part of Bold Business Insight’s underground economy series.
“Under the law, even illegal income is subject to the federal income tax and must be accurately reported to the IRS. However, this also means that those who report income from illegal activities may also be concerned about protecting themselves from criminal liability.” – Urban Justice Center
Motivations for Sex Workers Not to File
Like many other cash-based occupations with under-the-radar income, sex workers have some natural incentives not to file taxes. Avoiding tax deductions from earnings keeps more in your pocket. But when it comes to sex worker tax evasion, there are other more powerful motivations. One involves the stigma associated with sex work. Even those considered to be operating in legal areas worry that filing their taxes might reveal their occupation to others. This is especially true for those whose primary source of income is from this type of employment. In addition, it can be challenging to track and record cash-based income in some situations. This further discourages accurate reporting and filing for some.
However, the largest sex worker tax risks relate to the potential criminal risks involved. Reportedly, the IRS cannot disclose anyone’s taxes to legal authorities as a means to start a criminal investigation. But if an investigation is already ongoing, this may not be the case. In addition, laws concerning accountant-client privileges and confidentiality are highly vague. That means one’s accountant may be forced to turnover tax information to authorities. For sex workers operating illegally within various states, these are serious concerns. As such, many suspect sex worker tax evasion is common.
Sex Worker Tax Risks for Not Filing
Like any cash-based business, motivations to file may be driven by the need to claim income. Home and car purchases as well as loan and credit card applications require documented income. However, at the same time, sex worker tax evasion risks are sizable in comparison to those associated with filing. Consider the following example. Maryland, a strict state against sex work, has a maximum jail time of one year and a $500 fine for initial violators. However, for sex worker tax evasion, initial crimes carry a federal jail time of five years and a $100,000 fine. In addition, the same criminal exposure for sex work acts exists when such prosecutions take place. Based on this alone, sex worker tax risks are significantly higher when the decision is made not to file.
Of course, these risks are academic if enforcement fails to occur, or one never is caught. However, this is not the case. In many instances, local sting operations that expose sex workers have difficulty convicting the majority. While headpins may be the target of law enforcement efforts, going after others is simply not cost-effective. But what does routinely occur is the reporting of these individuals to the IRS by local law enforcement personnel. If sex worker tax evasion is suspected, the IRS receives a tip accordingly. Thus, even if prosecution for a sex crime isn’t pursued, sex worker tax risks persist and often result in charges. By all accounts, sex worker tax risks are worse when filings are not performed.
“It’s easier to prosecute for tax evasion than the actual crime itself. We can prove no taxes were paid and sometimes it is the easiest, most effective way to prosecute.” – Denver Police Lt. Matt Murray
Best Evidence for Sex Worker Tax Behaviors
While many accuse the vast majority of sex workers from failing to file their taxes, surveys suggest otherwise. In one survey involving 304 sex workers of various occupations, a total of 75% filed their taxes. At the same time, more than half claimed all of their earned income despite sex worker tax risks. Based on this, it would seem that sex worker tax evasion is not as common as suspected. But on the flip side, this still indicates a quarter do not file and choose to take their chances. Based on the estimated size of the industry, this remains a notable figure for which government taxes are not received.
Among sex workers who do file, there are some interesting strategies that are utilized. One of the most interesting are those who earn a degree in nursing or psychology. They then establish a self-employment business and claim their income through these entities. In doing so, all income can be readily claimed, and expenses can be written off against this income. This type of approach may not be honest, and it would never hold up to an audit. But it is one way to mitigate sex worker tax risks in reporting income from illegal activities. And it does effectively avoid sex work tax evasion penalties.
A Problematic Underground Economy
As is evident, sex worker tax risks exist no matter how income is handled. Sex worker tax evasion can result in serious threats while reporting income also has its own set of issues. The better of the two evils supports filing taxes rather than avoiding them. And creative ways may need to be considered in an effort to best achieve this. But contrary to popular belief, most sex workers do file taxes and the majority claim all income. Resolutions are needed, but it appears the issue is not as sizable as once perceived.