Self-Serving Reasons to Report Income
When you self-report your income - whether that's because of freelance work or because most of it is from tips - it can be VERY tempting to under report or completely leave out parts of your compensation. But even if you aren't worried about cheating the system or getting caught, there are a variety of self-serving reasons to accurately report your income: even though that means losing part of your hard earned money.
You lower your ability to qualify for loans in the future: Let's say you're working at a strip club and you've been reporting your wages at around minimum wage, even though you typically make much more than that in tips. If you go to get a car loan, the bank will want to see what type of income you have and how much you make monthly. If you self-report your income they'll look at your last few tax returns to see if you have consistent revenue. If you've reported ~$15k of revenue for the past few years, and you spend like you earn much more, than it's really unlikely that the bank will approve you for a loan. Sure, you could pay for it cash, but that strategy only works for lower ticket items and non-documented transactions. Plus, this means you're missing out on the ability to leverage your assets and make your money work for you.
You lower your future social security income: Each person's social security income is calculated based on the average wages they earned during the 35 most profitable years in their life. So let's say you're a Twitch streamer and you're making six figures for over a decade. If you don't accurately report that income, then the IRS will calculate your average income as much lower than you deserve. In 2021, the most a high-earning person could receive monthly from SS is $3,895 and this increases to keep up with inflation. But there's not a minimum amount of Social Security they're required to pay you if you didn't accurately report your income. So you're risking only receiving a few hundred a month in retirement or nothing at all. Now there is the possibility that the Social Security system won't still be fully funded by the time you retire, but it's likely that they would just "turn down the water pressure" rather than shutting off the tap completely, so it's worth considering your missed retirement income if you fail to report now.
You lower your proof of income: When you enter into a financial agreement these days, most lease companies and landlords will require proof of income. That usually looks like paystubs or tax returns for the self-employed. Since the cost of living in most areas is significantly higher than the minimum wage, you're limiting your rent opportunities by artificially lowering your proof of income. Obviously, there's ways around this - legal and not - but the opportunities available to those who can not prove substantial income will be limited and much less reliable in nature.
You lower your ability to utilize tax benefits & public aid: The government is not angelic, by any means, but there are definitely government aid options that should be utilized - and not just if you're struggling. Often times, if families are under reporting income, they are less likely to take advantage of benefit programs because they're trying to fly under the radar. Unfortunately, that means leaving money on the table from education, dependent, and work-expense deductions. In the short term, this decision might make the most sense for cash needs. But in the long term, you're cutting yourself off from assistance.
You lose freedom to spend on what's important: Many sex workers are motivated to put in long hours and hard work because they are focused on achieving their goals. Whether that means buying a house, starting a business, putting themselves through college, or providing for their family. And short term, you are able to retain more earnings and stack those dollars faster if you aren't paying as much in taxes. But long term, you keep yourself from being able to publicly spend those funds. When you or a family member attends school, they document your financial situation for financial aid purposes. This is the same with most childcare and organized sports. Because there is often fraud in this area, it's a red flag if you can magically afford tuition while reporting low income. And if you lie when you're filling out the FAFSA or other financial forms, this information gets back to the government and you can face criminal charges. Likewise, when you want to buy a house, legally start a business, or put money into any regulated system, the contribution is tracked. Tax fraud is often detected by spending money that wasn't already tracked in a system, so this forces you to protect yourself by only spending your savings in cash without documentation, which severely limits your ability to succeed.
In the end, failing to report or under reporting income sabotages your ability to improve your financial and living situations. While the tax system is bull-shit and the game isn't fair, we still have to play it to get ahead. At this point with technology all the systems interact with each other, making it almost impossible to reach certain milestones without following the (ever changing) rules. If you haven't been taking them seriously, that's OKAY, but you need a plan to get on track. One of major things I go over in my coaching is how to start building (or rebuilding) your credit, how to legitimize your situation, and how to build off of those blocks so that you can leverage your assets to help you achieve your larger goals.
