The more usual expression is to 'work your ass off', for example, as in the familiar complaint 'Here am I, working my ass off to keep this household going and all you do is sit about complaining and spending the money!'. It's a colourful expression to mean that the person is working very hard and for long hours.
'Dancing your ass of' is a version of this, suggesting that the person was putting a lot of effort into their dancing. It's not a phrase you'd use the first time you're introduced to your new boss, but it's not taboo. As an expression, it's funny rather than rude.