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If you’ve ever worked with above-the-line talent, you’ve probably heard “loan-out” before. Loan-outs have become quite common in the entertainment business, and it’s not unusual to engage someone who works and is paid through their own company.
Producers must always take care to follow payroll laws. While you may have a grip on those laws, paying loan-outs can be a bit complicated; so it’s crucial you understand the details. That way, you can stay compliant and keep your production running smoothly.
What is a loan-out company?
A loan-out is a company established by an individual professional through which they offer their services, rather than being hired directly as an employee of the production company. To qualify as a “personal service corporation” under IRS rules, the professional must own at least 10% of the company and provide 20% of its services.
By adopting this structure, the individual becomes an employee of their loan-out rather than a direct W-2 employee of the production.
This arrangement may actually benefit the producer’s bottom line as it shifts payroll taxes to the loan-out. Basically, the producer pays the loan-out a gross amount, and it becomes the responsibility of the loan-out company to withhold payroll and other taxes. However, there may be risk to the production if the loan-out fails to properly remit taxes or other required amounts, or to comply with other employer obligations such as those relating to unemployment insurance. Taxing authorities or other government regulators may also challenge the validity of a loan-out company, which producers should consider in their contractual arrangements with loan-outs.
Who usually has a loan-out company and why?
Loan-outs are commonly adopted by talent, such as actors, directors, and other above-the-line individuals. While less common, some below-the-line department heads and other crew may also opt to establish a loan-out arrangement.
Simply put, the primary advantage of a loan-out is that it enables greater professional and financial flexibility, including the ability to maximize tax deductions for expenses like travel or office equipment.
What types of corporations can be paid as loan-outs, and which documents must they provide?
Many different types of companies can take advantage of the loan-out structure, but proper paperwork is crucial in safeguarding yourself and your production from legal liability. A single misstep in this process can result in a dispute and deplete production cash reserves for legal resources. To ensure a smooth and compliant payment process, it is best to address these matters upfront.
Here are the required documents for different types of entities:
- Corporation: C and S corporations are eligible for payment. They must provide Form W-9 and Articles of Incorporation.
- General partnership: Acceptable for partnerships with two or more partners. They must provide Form W-9 and a copy of the Statement of Partnership Authority.
- Limited partnership: Must be formally organized as a limited partnership and provide Form W-9 along with a copy of the Certificate of Limited Partnership.
- Multi-member LLC: Applies to LLCs with two or more members that have elected to be taxed as a corporation or partnership. They must provide Form W-9 and a copy of the Articles of Organization.
- Single-member LLC: Applicable to LLCs with a single member who has elected to be taxed as a corporation. They must provide Form W-9 and a copy of the Articles of Organization. If the W-9 is not completed correctly, the loan-out must provide either IRS Form 8832 (the election form) or Form 1120 (corporate tax return). Failure to provide these tax forms would require the individual to be paid as a W-2 employee with taxes withheld.
How does a payroll company help production remain compliant when paying a loan-out?
To ensure compliance, a payroll company takes charge of collecting and confirming the necessary paperwork from each loan-out, verifying the information with the relevant state where the loan-out is incorporated and performing back-up tax withholding where required by state law.
If the individual associated with the loan-out is a guild member, a qualified payroll company will accurately calculate and remit the required fringes to the appropriate guilds.
Be Prepared to Pay Loan-Outs
Loan-outs are an inevitable part of staffing a professional production, and understanding how to stay compliant will save you time and headaches. It’s also important to seek the guidance of an attorney and tax professional. They’ll help you navigate the complexities of legal and financial matters related to loan-outs. Always prioritize due diligence and compliance to maintain a legally sound production. Engaging a reputable payroll company like Media Services (and the entire Cast & Crew family of payroll companies) can streamline your pay process and facilitate compliance with tax regulations and union rules.
