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Why “Employer-of-Record” Payroll?

Original publish date: May 4, 2018

When you engage the services of any reputable entertainment industry payroll provider, you will invariably hear the term “employer-of-record” associated with the organization and its payroll services. (If you don’t, you should certainly ask the provider if they do in fact act as employer-of-record for your crew and talent payroll processing.)

It’s not just a fancy-sounding term that’s fun to say at parties; it’s actually integral to the type of payroll service that specifically benefits the production industry. In fact, it is exactly the short-term nature of production employment that makes an employer-of-record payroll service so crucial to your business.

Let’s break down why that is.

First, what exactly is an employer-of-record payroll service? Also known as a statutory employer, an employer-of-record literally goes “on record” as a true co-employer for all the employees you pay through them, for tax reporting and workers’ comp coverage purposes (not for wage-and-hour compliance, hiring/firing, etc.). That means the payroll service is using its own Federal Employer Identification Number (FEIN) and state Employer ID numbers to take on the full weight of responsibility for two of the biggest payroll liabilities of any production company: unemployment and workers’ compensation.

For this discussion, we’ll focus just on the first one.

Unemployment: Who Pays?

As you probably know, there are state and federally mandated types of unemployment insurance all employers must pay into, in the form of payroll taxes remitted to the state and federal governments, to fund their respective unemployment war chests. The Federal Unemployment Tax Act (FUTA) imposes collection of a percentage of gross payroll from each employer, per employee, to go toward federal unemployment funds. Similarly, the State Unemployment Tax Authority (SUTA) mandates collection of employer taxes for state unemployment funds, based on the work state.

The rate for FUTA per employee is somewhat complicated, but to keep it simple, in most cases it currently nets out to 0.6% of gross wages for each employee you hire, applicable up to gross wages of $7,000 per year. If you’re keeping score at home, that means the most you pay in FUTA contributions for each employee in a given year is $42 (0.6% x the $7,000 ceiling = $42). Not too bad, right? Stick around.

SUTA is a different animal. Every U.S. state has its own range of SUTA fringe rates, which vary for every employer doing business in that state, based on the employer’s experience rating. The experience rating is basically a history of the employer’s layoffs in the state: the greater the number of former workers an employer has added to the unemployment rolls, the more state unemployment funds the employer has effectively used up… hence, an employer with more layoffs over the years must now pay a higher SUTA rate, in order to help replenish the unemployment coffers. Make sense?

When an employer has been in business for many years and has had many short-term, full-time employees, that adds up to a lot of “layoffs” and a relatively high experience rating in the state. This is the case for all established production payroll companies who act as employer-of-record, due to the project-by-project nature of crew employment.

Thus in many states, your established payroll service is being charged the maximum SUTA rate for that state. For California, the current maximum is 6.2% (on a $7,000 ceiling); for New York, the max is 8.3% ($11,100 ceiling). So when you run payroll through an employer-of-record provider with plenty of experience, you end up paying SUTA at their max rate.

Couldn’t I get a lower SUTA rate by using my own company’s FEIN?

Maybe so. If you just started up your production company this year, and it’s your first time employing anyone in the particular state, you would likely be assigned the “new employer” rate, generally lower than the state’s maximum. For example, in California the current new employer rate is 3.4%. Sounds better than 6.2%, right? Well, let’s take a closer look.

If you take the new employer rate, you’re saving 2.8% on up to $7,000 per employee, or a maximum savings of $196 per employee per year. However, that means you must file with the state as an employer and start making quarterly unemployment filings and payments to the state under your own company’s ID number. Some smaller payroll companies, or those not specializing in entertainment payroll, may even offer to make those payments for you at your own company’s rate. Sounds fantastic!

But then, your production wraps.

Now all those crew members and performers are out looking for work again. And if they don’t find it, they file for unemployment. It’s nothing personal; it’s just something freelance crew and cast members often need to do to bridge the gap from one job to the next. And guess who’s on the hook for it? If you used your own company’s FEIN and state ID number rather than that of an employer-of-record payroll firm… you are.

That’s because all the unemployment claims tied to your company’s state ID now go against your experience rating in the state. Which, by the way, is retroactive… so when you go to file for the next quarter, the state system will discover those claims from your former workers, and require you to make an additional payment at your new, higher SUTA rate. Suddenly, your 2.8% margin is getting whittled down, as your company’s SUTA rate creeps up.

But wait, you say! I don’t file anything… my payroll provider is in charge of that, right? That depends. Are you still processing payroll with them, on another production? Then, maybe so. (Be sure to ask.) But if this was a one-and-done, or you’ve moved on to another payroll provider, you can be sure your original payroll company is no longer making payments or filings on your behalf.

In fact – and this is probably the biggest downside – you are now obligated to continue to prepare and submit quarterly SUTA and FUTA filings forever, even if there are no claims against you, and even if your company has no employees! The only way to relieve your obligation to make these time-consuming quarterly filings is to dissolve the company in that state.

You are now obligated to continue to prepare and submit quarterly SUTA and FUTA filings forever, even if there are no claims against you and your company has no employees.

How is it different with an employer-of-record payroll firm?

An established employer-of-record payroll provider, or statutory employer, generally takes on all obligation and liability for unemployment. Period. The amount you pay for SUTA on your payroll invoice is the last you’ll see or hear of unemployment for your production… whether the show ends up with zero claims or a hundred claims.

The employer-of-record payroll provider takes the hits, defends against any false or frivolous claims, and pays all future rate increases on its own. Not only that, the payroll provider continues to file the quarterly unemployment reports and make all payments under its own FEIN and state ID, indefinitely… you never file any unemployment reports on your payrolled crew.

For newer production companies, this is a weighty decision, and should be made in consultation with a qualified tax specialist. Sizable production companies, or those that plan to produce more projects in the future, often opt for an established employer-of-record payroll service for the reasons outlined above.

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