Industry Insiders May Face Tax Bills as California Reportedly Tightens Payroll Rules on Loan Out Corporations

The state of California has warned entertainment industry payroll providers and others that it is implementing policy changes that could have significant tax and retirement planning implications for those in Hollywood’s creative community who use loan out corporations to manage their business affairs.

The California Employment Development Department has reportedly alerted payroll service Cast & Crew, IATSE and others of the plan to tighten rules for the use of loan out corporations. Many creatives in the industry use such a business structure to manage different forms of payments that flow in from disparate employers throughout the year. That’s increasingly common in the modern era when actors, writers, producers and directors often work on multiple TV shows or movies in a calendar year.

The change reported would mean that Hollywood employers would be required to pay creative talent wages as individuals and not as contractually obligated fees owed to a standalone business entity, as a loan out corporation is structured. Shifting to treating payroll income as employment wages would require “full income tax withholding and payment of employee and employer taxes on all income the [loan-out company] owners earn,” IATSE Local 695 told its members earlier this month. “This would fundamentally change the way that department heads and above-the-line workers conduct business in the entertainment industry.”

Cast & Crew sent a bulletin Friday afternoon to the many industry workers about the change and urged them to participate in efforts to appeal to California EDD’s decisions on the status of various loan out corporations. IATSE also warned members that the state plans to assess unemployment insurance and other payroll taxes on past income, suggesting that members might wind up owing money to the state. IATSE and Cast & Crew both noted that the state EDD has an appeals process for assessments that members need to pursue.

“IATSE members who receive these notices that their loan out corporations MUST file a Petition in response to the EDD notice within 30 days of the date on the notice to timely appeal the EDD determination,” IATSE Local 695 warned in a May 21 message to members.

The Cast & Crew notice sparked much industry chatter — via text message chains and WhatsApp messages — on Friday evening and Saturday about the fate of loan out corporations.

The change involving the loan out structure is in keeping with California’s labor-friendly policy agenda under Democratic Gov. Gavin Newsom. Three years ago, the state enacted new rules that tightened up the length of time freelancers can work for the same company without being treated like a full-fledged employee from a payroll perspective. That change, aimed largely at aiding gig economy workers such as Lyft and Uber drivers, proved so onerous for showbiz workers and other professionals who routinely work on a freelance basis that the rules were gradually loosened.

Representatives for the California EDD and IATSE did not immediately respond to requests for comment on Saturday about the policy change regarding loan out corporations.

The Directors Guild of America addressed the confusion sparked by the state EDD warning in a statement issued Saturday. “We are aware of the recent EDD statement to payroll providers on loan-out companies,” a guild spokesperson said. “The DGA is monitoring the situation and working in collaboration with our fellow unions and guilds to investigate and respond in order to protect entertainment industry workers.”