Here’s Why Loan-Outs Sent Hollywood Into Panic Mode Over Memorial Day
A late Friday afternoon before Memorial Day weekend isn’t the best time to sound an alarm, but that’s what happened when a major Hollywood payroll company Cast & Crew sent an email informing unions that the California Employment Development Department (EDD) wanted more of their members’ money.
At issue, Cast & Crew said, were loan-outs. These entities aren’t generally controversial, or even very interesting; loan-outs are corporate entities (most often a S-Corp) that allow freelancers to be paid through that company rather than as an individual (the company is “loaning out” the services of its employee).
Cast & Crew said that after an EDD audit, the EDD planned to issue warnings to loan-out companies within the next 30 days. It also would require employers to directly pay its contracted employees and Cast & Crew anticipated that this would quickly become “an industry-wide issue.”
On May 28, presumedly after a number of concerned calls to the agency by the Hollywood unions, Hollywood insiders, and Californian politicians, the EDD released a backpedaling statement.
“We understand the great importance of California’s film and television industry and are proud of our work to support California’s employers and industries,” the agency’s statement read. “We have received various inquiries highlighting questions about loan-out corporations’ ability to operate in California. As we have previously stated, EDD is not taking action to ban these companies in California.”
False alarm? Maybe. But loan-outs may be facing increased resistance.
Since the fall of the old studio system, Hollywood has been the original gig economy: Virtually everyone who works in production, from the director to the best boy, is a freelancer. Producers, cast, and department heads who make high weekly wages can mitigate some of the tax consequences by being paid through loan-outs.
A loan-out has its drawbacks. They make tax day more expensive and more complicated, demanding a specialized accountant as well as substantial fees and paperwork. TV and film employees paid through loan-outs also can’t file for unemployment benefits when their productions end.
Crew members who spoke to IndieWire said that studios vary on how many loan-outs to allow per production, and the benefit is often confined to cast, screenwriters, producers, and most department heads. Loan-outs are also a moot point for some; accountants advise that the financial benefits aren’t realized until someone consistently make more than $120,000 per year.
“On average” is key, since it’s never consistent; few people work 52 weeks a year. (If the 18-hour days don’t get you, the current production contractions will.) Loan-outs can make the work more sustainable by giving their owners flexibility with the payout of their salary, which is still subject to all income and payroll taxes. When faced with feast-or-famine employment, loan-outs allow workers to pay themselves what they need to live while they are working, and not working.
Before it can become salary, loan-out income resides in the corporation and can be used to pay business expenses, including union dues, accountant and loan-out fees, software and equipment before it’s subject to payroll taxes. Loan-outs also let people put pre-tax dollars toward retirement accounts, which helps freelancers who don’t have the 401K plans of many salaried workers.
Above all, loan-out companies can supply the tools and controls to manage money and navigate the tax code in way that would be otherwise impossible. In the current environment, where it is increasingly hard to make a living making film and TV, every benefit helps.
