California EDD Tightens Payroll Rules on Loan Out Corporations, Raising Tax Implications for Industry Professionals
May 25, 2024 2:50pm PT
By Cynthia Littleton, Business Editor
In a significant development, the California Employment Development Department (EDD) has announced policy changes that could have far-reaching consequences for Hollywood professionals who utilize loan out corporations for their business affairs.
Changes to Loan Out Corporation Rules
According to reports, the EDD intends to treat payments made to loan out corporations as individual wages, rather than contractual fees paid to a separate business entity. This shift would require employers to withhold income taxes and pay employee and employer payroll taxes on all income earned by the loan out corporation owners.
IATSE Local 695 has informed its members that these changes would “fundamentally change the way that department heads and above-the-line workers conduct business in the entertainment industry.”
Implications for Creative Talent
The proposed changes could have significant tax ramifications for industry professionals who rely on loan out corporations to manage their income from various employers.
- Higher Tax Withholding: Wages paid to individuals are subject to full income tax withholding, potentially increasing the amount of taxes owed by creative talent.
- Loss of Retirement Planning Flexibility: Loan out corporations provide flexibility in retirement planning options, such as the ability to contribute to SEP IRAs and 401(k) plans. Changes to the payroll structure could limit these options.
- Potential Retroactive Tax Assessments: IATSE warns that the EDD may assess unemployment insurance and other payroll taxes on past income, potentially leading to outstanding payments owed to the state.
Industry Response
Cast & Crew has issued a bulletin to industry workers, urging them to engage in efforts to appeal the EDD’s decision. IATSE has also advised members to file timely petitions in response to any EDD notices regarding their loan out corporations.
The Directors Guild of America (DGA) is monitoring the situation and collaborating with other unions and guilds to investigate and respond in order to protect industry workers.
Labor-Friendly Policy Agenda
The changes to loan out corporation rules align with California’s labor-friendly policy agenda under Democratic Governor Gavin Newsom. In 2021, the state enacted new rules aimed at addressing freelance work classification issues, which had previously caused concerns for showbiz workers.
Conclusion
The EDD’s policy changes regarding loan out corporations have sparked uncertainty within the entertainment industry. Creative talent and their representatives are advised to seek professional guidance to understand the potential implications and consider adjustments to their business affairs. The DGA and other unions are actively engaged in representing the interests of industry professionals as the situation evolves.