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Getting Ready To Send Out W2s to Your Crew? The CA Supreme Courts Thinks You Should Be.

As we mentioned back in April, the California Supreme Court has weighed in on what makes a worker an independent contractor rather than an employee. As it turns out, the qualifications are rigorous. While the studios have long known that their production crew members don’t qualify as independent contractors (which would theoretically free the employer from payroll taxes, workers’ compensation and unemployment liabilities), some independent producers still operate under the mistaken idea that they do.

What’s the difference between independent contractors and employees, anyway?

Can someone really be an employee if they only work for one day? Certainly. An employee is someone who performs work at the direction of a person or entity, for pay. When that happens, the government wants the employee to have a safety net in case of injury, layoff, retirement and in some cases, sick time. Equally important is that the government gets paid its share of the employee’s wages in the form of income tax; as well as contributions to cover unemployment, disability and retirement (Social Security) benefits via employer payroll taxes.

It’s that last bit (employer payroll taxes) that inspires many an otherwise-upstanding production company to engage in inadvertent tax evasion by claiming that its crewmembers are actually independent contractors (1099) rather than employees (who get a W2). But while the bar was already high for qualifying a worker as an independent contractor, the California Supreme Court raised it further (or maybe just clarified it with straightforward scenarios). The court followed similar clarifications in Massachusetts and New Jersey, by spelling out three concrete requirements for an independent contractor classification.

According to the ruling, the worker must:

  • be free from the control and direction of the employer (can’t be compelled to show up for certain hours and do specific tasks – kinda like a film crew does)
  • perform work that is outside the hirer’s core business (like when a plumber fixes a leak at a retail electronics store… that plumber could legit be considered a contractor. A crewmember working on a movie, for a company that makes movies, doesn’t pass the test)
  • customarily engage in “an independently established trade, occupation or business.” (this is the one that throws people… but if you think about the plumber example above, the plumber probably has storefront, signage, advertising, a website, a truck with equipment… things your average P.A. will not have)

It’s important to note that the burden of classification falls completely on the business, and not on the worker. Even if the worker expressly states in writing that they consider themselves a contractor and want to be paid as a contractor, it’s the would-be employer that will suffer the consequences in penalties and lawsuit payouts.

The burden of classification falls completely on the business, and not on the worker.

You may ask: if the worker wants to be paid as a contractor, and that’s how I pay them, why would they then report the misclassification? Isn’t everyone happy as a clam?

Top two ways production companies get busted for misclassifying employees as independent contractors:

  1. Crewmember gets hurt.
    In addition to evading payroll taxes, productions also misclassify their crew as contractors to get avoid paying workers’ compensation premiums. This is an enormous liability for both the production company and its owner(s). All it takes is a twisted ankle on set to put a crewmember out of commission. They can then come after you not only for the doctor bills, but also lost pay as a result of not being able to work – whether on your production or another job. Many a production has been exposed as misclassifying crewmembers based on one simple claim. If the accident is worse, and your workers’ compensation policy doesn’t cover “independent contractors” – and it most likely doesn’t – you could be on the hook for significant sums of money in damages.
  2. Crewmember files for Unemployment.
    Many productions are surprised, halfway through the shoot, to find a day player from week 1 has filed an Unemployment claim against the company. When the company tries to argue that the person was not an employee, but an independent contractor, it opens itself up to greater scrutiny of the entire crew – with all the overtime back pay, payroll taxes and penalties that go along with it.

So how do you pay your production crew the right way?

The best way to meet all your obligations as an employer is to classify your crewmembers properly as employees, and engage the services of a reputable statutory (employer-of-record) payroll provider. When you work with Media Services to pay your crew and castmembers, we not only apply the proper withholding, submit payroll taxes on your behalf and provide workers’ compensation coverage… we also file all W2s and send them to your workers at the beginning of the next year. Since the unemployment and workers’ compensation are under our company, we also resolve and pay out any claims, some of which go on for years or even decades.

Want to learn more about payroll services for your next production? Get in touch with us here, and we’ll get you all the information you need about rates and how the system works.

IATSE Reaches New 3-Year Deal with AMPTP

AMPTP_LogoA negotiating unit for below-the-line crew members reached agreement with the AMPTP on a tentative new three-year deal covering film and television production in Los Angeles, it was announced today. Neither IATSE nor the studios are releasing terms of the new Hollywood Basic Agreement as of yet.

If approved by the union membership, the pact will go into effect August 1, 2015, just after the current agreement expires. Early resolution of contract talks can give local production a shot in the arm, as producers and financiers avoid the worry of any work stoppage in the near future.

“I am pleased we were able to reach an agreement that provides industry stability and meaningful terms and benefits to the membership,” said IATSE International President Matthew D. Loeb.

“The industry is pleased we have reached a new agreement with IATSE months before the contract expires,” stated AMPTP President Carol Lombardini. “With the tentative agreement in place, our member companies can immediately begin planning production for the future with certainty.”

The negotiated deal will next be sent to the IATSE national board for approval. If it passes there, the next step would be member ratification vote.

CA Rolls Out First “New Program” Tax Credit Lottery in May

On April 1, the California Film Commission will accept applications for its last-ever tax credit lottery under what is now being referred to the “old program.” The office made an announcement today that a large number of television series productions currently receiving credits will return for an additional season and remain in the program for its final year – leaving only a handful of credits available to new productions and eliminating studio projects from eligibility for the final lottery.

Ten million dollars will still be available for independent productions via the lottery, with old program rules still in effect.

First Application Period for New Lottery May 11-17

The new program will have two application periods for fiscal year 2015-16 (July 1, 2015 – June 30, 2016). The first will be May 11-17, for non-independent television projects only. Credit allocations will be available July 1 at the earliest. Other details from the film commission:

  • $55.2 million in tax credits available for New TV series, TV pilots, MOWs, Mini-series for any distribution transmission
  • $27.6 million in credits available for Relocating TV Series (defined as a series with $1 M minimum production budget, previous season shot outside CA, and must attest that the tax credit is the primary reason for move to the state)
  • Projects will be selected via a new competitive ranking system based on jobs and other criteria

A second application period, to be announced this summer, will cover other types of production. Read more about the old and new programs at the California Film Commission website here. Learn about production incentives nationwide here.

Amazon Streams to Globes Victory with “Transparent”

Jeffrey Tambor Transparent Amazon screenshotIt’s no secret that television has been giving features a run for their money in recent years in terms of critical praise and bragging rights. The 2015 Golden Globes proved to be truly groundbreaking in a whole new way though, as two of the biggest television awards were given for a show that has never seen a traditional airwave.

Amazon Studios chalked up the first major streaming crossover win with Transparent, which took home Winner of Best Comedy and Musical Series and Best Actor in a TV Series, Musical or Comedy for Jeffrey Tambor. While streaming stalwarts like Netflix’s House of Cards and Orange Is the New Black have struck Globe gold before for performances (indeed, Kevin Spacey won for Best Actor in a Drama Sunday night as well), none has taken one of the coveted “Best Series” awards until now.

What makes Transparent a double winner is its boundary-pushing subject matter, opening the door wider for communities that aren’t always represented in Hollywood. Tambor stresses that fact as he tells journalists, “This is about changing lives.”

Kudos to our friends at Amazon for taking a leap not only in becoming a front runner in the world of original programming, streaming or otherwise, but on taking a chance with the choosing of atypical topics… which paid off Sunday night in a big way.

Read more about the Transparent wins and the streaming revolution at NPR.

The ACA, Independent Contractors and You

As we all know by now, under the Affordable Care Act (ACA) employer mandate, an applicable large employer that does not offer affordable minimum value group health coverage to its full-time employees (and their children up to age 26) may be subject to employer-shared responsibility penalties under Internal Revenue Code §4980H. Whether an employer is an “applicable large employer” depends upon its number of full-time (and full-time equivalent) employees.

Due to these provisions, the use of independent contractors can become an even stickier wicket than before. Some production companies classify workers as “independent contractors,” “consultants,” “contingent workers,” “freelancers,” or other similar terms. These would include those workers working through a “loan-out” company (Corporations, LLCs, etc.).

Employees (those receiving W-2s) are subject to wage and hour requirements, federal and state income tax withholding, FICA withholding, employment taxes, and, most recently, the ACA employer mandate. There are no such costs for independent contractors, such as those working through loan-outs, as the loan-out is the employer of the worker, not the production company.

It is important for employers to understand the differences between an employee and an independent contractor, especially in today’s ACA climate. In addition to potential ACA penalties, significant tax consequences result if a worker is misclassified as an independent contractor and is subsequently reclassified as an employee, including: liability for withholding taxes, interest and penalties, and the potential disqualification of employee benefit plans. Insurance coverage can be offered to those workers working through a loan-out, and ACA penalties may be avoided; however, as mentioned above, employers may still be subject to other tax consequences should the IRS determine the worker was misclassified.

It’s important for every employer to review the common-law employee rules, makes sure it has properly identified all of its common law employees as employees. More information is available on the IRS website here.

Media Services’ ACA Benefits Eligibility reports for the purposes of tracking hours has mechanisms built in to include or exclude loan-outs, based on the production company’s preference. Additionally, our insurance plans allow the participation for those workers working through loan-outs to enroll in their chosen plan.

Learn more about our ACA-compliant health plans with the lowest premiums in the industry.

Julia Nicholson in as CEO of Industry Pension & Health Plan

The Motion Picture Industry Pension & Health Plans appointed a new CEO, Julia Nicholson, to helm the plan that provides benefits to over 120,000 members of the entertainment industry and their families. According to the Hollywood Reporter, Nicholson was previously VP of Operations for UFCW & Employers Trust, which similarly administers large health and pension plans. With MPI being the biggest benefit plan in the entertainment industry, that background should come in handy in the new post.

“Julia is a seasoned executive in the employee benefits field, with particular expertise in (union benefit) plans,” MPI board co-chair Michael Rosenfeld was quoted as saying in the Reporter. “Julia’s success running multi-billion-dollar pension and health funds make her an ideal executive to lead MPI as we continue to provide benefits to tens of thousands of professionals in the motion picture and television industry.”

5 Things You Need To Know about Residuals

Residuals Faucet

One of the biggest question marks when trying to ensure profitability on a film or TV project is the residuals payment obligation. The talent guild agreements are filled with nuanced rules that can end up costing an unsuspecting producer or distributor much more than anticipated.

Here are five tips to keep in mind, both when estimating the total cost of your film and when negotiating licensing deals to make sure they’re profitable.

  1. Leaving someone off the cast list results in more than hurt feelings.Improper verification of the residuals cast list (i.e., getting it wrong) can generate claims and additional costs. Here are some common errors in creating the residuals cast list:
    • Omission of SAG- AFTRA Talent
    • Upgraded Extras
    • Talent in re-shoots
    • Stunts and stunt coordinators in second unit
    • Choirs hired in post-production
    • Talent called to loop or re-voice
    • Talent in clips or excerpts from other films or recording used in film
    • Celebrity look-alikes, sports stars, political cameos hired outside normal casting
    • Nude body doubles hired as principals
    • Failure to properly calculate SAG or IATSE residuals proration
    • Failure to recognize special agreements or waivers negotiated at the time of production
  2. The first million is the sweetest. Under all collective bargaining agreements, residuals on the first $1 million reportable receipts from Home Video are payable at lower percentages.  In cases of shared distribution territories, agreements should detail which entity gets the benefit of these lower residual rates. In cases where the agreements do not make this clear, it is to the distributor’s benefit to make the first Home Video reporting.
  3. Watch out for the ol’ PH&W prepay. Advances to star talent are often made prior to production and outside of a payroll service. Consequently, these amounts are sometimes overlooked in preparing the residual cast list and are not credited toward that talent’s Pension Health & Welfare contribution ceilings. This results in overpayment of PH&W on residuals.
  4. Separate payroll services = doubled PH&W contributions. In cases of shared distribution where the responsible parties are using separate payroll services, residual payments made by one party are not likely to be credited by the other against talent PH&W ceilings. This also results in another PH&W overpayment on residuals.
  5. Be an approval-seeker when it comes to setups. When two parties are using separate payroll services, it’s important to coordinate the approval of the residual setup. Making residual payments based on different allocation or proration would be a red flag for an audit.

One of the best things you can do to protect yourself and make your film attractive to distributors is to get your final residuals cast list together while you’re still in production. A residuals payment service can help you assemble the list, and should even be able to forecast the cost of residuals for various release-to markets.

Learn more about Media Services Residual Payments, or request more residuals information here.

DGA Talks with Film/TV Producers Set for November 4

The DGA and AMPTP will enter into formal talks for a new collective bargaining agreement on November 4, 2013. According to a joint statement, the negotiations will be held at AMPTP headquarters in Sherman Oaks, CA under a press blackout. The DGA – which represents directors, assistant directors, UPM’s and technical coordinators – has often reached agreement with the studios in relatively short order once talks have started. Of the three major Hollywood above-the-line talent guilds, the one that negotiates first in a given contract cycle has historically set the unofficial “template” for agreements with the other two. In the latest round of talks three years ago, when the DGA again negotiated first, that template included 2% wage increases and language addressing new media programming and playback.

The WGA has the first agreement to expire, in May 2014, while the DGA and SAG-AFTRA contracts don’t expire until the end of June. Once an agreement has been agreed to by both sides, it will go to the DGA’s national board for review, and if approved will be sent to membership for a ratification referendum.

Record 322 Applicants for CA Tax Credit; Nearly Doubles Last Year’s Number

California state map cartoonA record 322 applicants submitted projects for the California Film & Television Tax Credit Program last Friday, hoping to be chosen at random for the 20-25% nonrefundable credit for qualifying features and TV series. Because the $100 million annual allotment to the credit is typically not enough to cover all the productions that apply, a lottery is used to select the applicants that actually receive the credit. This year the lottery process, which is completed in one day, drew nearly twice as many submissions as 2011.

Once an application is submitted and vetted by the California Film Commission, it is placed in a queue. During the lottery, queue numbers are chosen at random, and those projects are given the opportunity for a tax credit allocation. Projects that do not get selected in the lottery are placed on a waiting list and offered allocations as they become available due to withdrawals, disqualifications, cancellations of projects, etc. This year, 28 projects were selected out of the 322, though many more from the waiting list could end up receiving credits – for example, last year there were 27 projects selected, but 74 ended up benefiting in the end.

While the film & TV tax credit program is set to expire in a year, a bill has been proposed in the California Assembly to extend the program in the state through 2018. The original tax credit was created in 2009. While the $100 million annual budget and 20-25% credit are considered modest in film incentive terms – consider New York’s 30% state film tax credit, funded by over $400 million per year – the California credit is viewed in some studies as a pivotal factor in a windfall in film production and thousands of production jobs created in the state since the program was initiated.

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