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The response to this memo has been overwhelming. Many cash-based professionals, with little or no business records, have contacted me after reading it. If you are one of those professionals, and have tax and accounting questions, call me on 732-673-0510. I promise all calls are kept strictly confidential.
Definition: A Sugar Baby exchanges physical and emotional attention for cash and other compensation, with a Sugar Daddy. This other compensation may take the form of property (gifts), the direct payment of the Sugar Baby’s debts and living and other expenses.
These Sugar Baby arrangements are usually between a college aged woman and a much older wealthy man. The Sugar Baby has bills they cannot pay, things they want to buy, and vacations they want to take, and the wealthier man wants physical attention from a much younger woman.
The exchange of the Sugar Daddy’s assets for physical access to the Sugar Baby is the substance of this transaction.
This memo was created after I received a call from a 20 year old female college student who found a Sugar Daddy on the website www.seeking.com. She was paid over $60,000 in cash from a Sugar Daddy so far this year and he had paid over $20,000 of her college tuition. She asked me if she needed to report this $80,000 of income on her tax return.
I believe that under the IRS “Substance Over Form” doctrine, these arrangements would be deemed to be “fee for service” and all proceeds would be taxable to the Sugar Baby. So I told her “Yes, you have self-employment income.”
Ok, so now you know that the money you are earning as a Sugar Baby is taxable. How do you handle your taxes?
Remember, Sugar Babies are business owners. So that means that you will be able to take expenses that you incur for your Sugar Baby business.
Below are examples of expenses that you can write off against your Sugar Baby income. Remember, anything that you spend money on that relates to your Sugar Baby business can be deducted. You want to keep track of this and that is another good reason why having that separate checking account is a great idea.
Deductible expenses include, but are not limited to:
- Advertising
- Costumes
- Makeup & Hair Styling
- Beauty Supplies
- Dry Cleaning
- Photography
- Props
- Travel
- Repairs & Maintenance
- Utilities
- Insurance
- Tolls & Parking
- Legal and professional fees
- Commissions
- Interest Expense
- Tax return preparation
- Telephone
- Office Supplies
- Postage
- Clerical help
- Bank charges
- Equipment purchased (Computers, Cameras, Cell phones, Printers)
- Business miles driven
- Dues & Subscriptions
- Office Rent
- Web Services
- Internet Related
- Bank Charges
- Facsimile
You’re Sugar Baby income will come into that separate checking account and then use that money to pay your business expenses. Then transfer the net money left over into your regular personal account. This will make it much easier at year end for us to total your expenses and do your accounting so we can get your tax return done.
Most importantly, this separates your main checking account from your Sugar Baby income.
Do not pay personal expenses out of this business account. Transfer money to your personal account and pay personal bills out of there.
TAX TIME
At the end of the year it will be tax time. Sugar Babies will fill out a form Schedule C, Profit or Loss From A Business, and include that on their form 1040 tax return.
All of the accounting that we discussed a few moments ago would go on this form. So your income will be shown at the top and your various expenses will be shown in the middle part of the form. You will pay income tax and self-employment tax on the net income shown on your Schedule C.
SELF-EMPLOYMENT TAX
Your Sugar Baby net income will be subject to ordinary tax as well as self-employment tax. This is something that people often miss and so their tax bills are higher than they expected.
Self-employment tax is how business owners pay their FICA tax. Many of you who have had jobs before have seen FICA taxes taken out of your paychecks. Social Security and Medicare Taxes are what comprise FICA tax. When you’re self-employed you also have to pay this. FICA tax is 15.3% of your net income and this is in addition to your ordinary taxes that you pay.
It is extremely important that you put aside money every time that you are paid so you can pay your estimated taxes later. Again, the money that you receive as a Sugar Baby is not the amount of the money you have available to spend on your personal expenses.
It is vital that you have a good CPA working with you to make sure your accounting gets done on a monthly basis and also that your estimated taxes are calculated during the year.
It is very important that you realize that you can’t wait to pay the taxes that you owe until April 15th. Self-employed people with their own businesses need to pay their taxes quarterly during the year. If you don’t pay taxes that way, and you wait to pay when you file your tax returns, then you’ll be subject to penalties and interest for late payment.
All of my business clients work with me many times during the year to keep their accounting up to date as well as to calculate their estimated taxes and get them paid during the year.
My CPA firm will help you every step of the way with your Sugar Baby business.
DOCUMENT RETENTION
I want to give you some document retention advice.
- Save all of your business records for 7 years.
- Take your time! For many of you this might be the first time you’re filling out paperwork like this. But don’t be intimidated you can definitely handle it.
- Be sure to save copies of everything either in PDF form in a directory on your computer or in paper form in a folder. Remember that you can print many screens in your browser window to PDFs. This is called a paper trail and when in doubt save as many applications and other online documents that you can as PDFs.
- You also want to keep copies of all of your receipts for all of your business expenses that you’re going to have.
- Keep pdf copies or paper copies of all of your business bank statements and be sure to also have copies of all checks that you have written.
Some more information on if Sugar Baby income are treated as gifts.
If these payments are not considered income to the Sugar Baby, the Sugar Daddy may have a tax liability as the amounts they are paying could be considered taxable gifts.
It is possible to get gifts from another person, but in the U.S.A. that is limited to $15,000 per year in cash or property. Once you exceed this number, the cash or other value “gifted” is taxable to the person giving the gift. In my opinion, the payment of the Sugar Baby’s bills would be considered compensation to her, and at least a taxable gift if over $15,000 from the Sugar Daddy.
Usually the total cash and other compensation to a Sugar Baby greatly exceed $15,000 per year.
So both the Sugar Baby and Sugar Daddy have a potential tax problem.
As these arrangements become more prevalent, I believe the IRS and state governments will come after both parties to collect the taxes they are owed.
These arrangements make getting gainful employment a financial loss for the young woman as follows:
Think about a scenario. A 22 year old female recent college graduate, instead of getting a $25,000 per year job where she nets $20,000 after taxes, goes to one of the websites that connects young women with older wealthy men, and she finds a 70 year old man who will pay her $40,000 a year to be his “girlfriend” and she has zero taxes deducted.
The 22 year old female is actually netting TWICE what she could earn if she worked full time.
She is making $40,000 in cash and gifts, if any of her debts or monthly bills are being paid, but is not paying any tax.
So we can now see why the federal and state governments are going to be scrutinizing these transactions much more closely.
More and more younger women are “Seeking Arrangements” and there are countless much older men waiting to “Find” them.
If you are concerned about the income you are making, and want to learn how to properly and legitimately report your income on your tax returns, call me on 732-673-0510. Even if you are mainly a cash business, you can easily file your income taxes.
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Tax Laws are complex.
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Remember,
“If We Aren’t Working For You, Then You Aren’t Working At Your Best”
Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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