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If these changes were to go into effect, individuals may see changes in their tax liabilities. This would include a decrease in their payroll tax liability and a decrease in the amount of expenses that they can deduct. Here are a few examples of how an individual may be affected:
5/25/2024 - Katie Mercer
Per a reddit post from u/LostDrama1283 and confirmed by several IATSE members, a notice from the payroll service Cast & Crew was sent out (left), stating the EDD for the state of California will require employers to directly pay for services to contracted employees following an audit of the company. The EDD no longer recognizes "loan out corporations", which are LLCs in which the creator is an "employee" of the LLC who then "loans" out their services. As the creator of the corporation is typically the only owner, the corporation can be used to reduce their personal liability, protect their assets, and gain certain tax advantages. With this ruling, these individuals will now be recognized as employees of the payroll companies instead of contractors for the studios who hired the payroll companies to process payments.
As of the writing of this article, there has not been any public, official statements made from the EDD to confirm this modification of the law or how this would be implemented. However, this may signal changes that could potentially impact workers in Hollywood on a drastic scale. Many actors, editors, athletes, production staff, etc. operate as contractors for companies in California, which may lead to significant changes in how these individuals and businesses address their tax liabilities.
What are the differences between being an employee and a contractor?
What are the differences between being an employee and a contractor?
Differences include the following:
See left for scenarios for different income levels.
In practice, these changes would seem to result in a potential benefit to low income earners and a significant reduction for high-wage earners.
However, this assumes one would still be getting paid the same wages as a W-2 employee as a contractor, which is realistically not going to happen. Individuals would likely take a pay cut, at least equal to the cost to pay the additional payroll taxes by the studio (7.65%). That reduction in income ($1.5k, $3.8k, and $7.6k for Individual A, B, and C, respectively) would inevitably result in a higher loss than the benefit gained from being a W-2 employee, which includes the reduction to income taxed from expenses. These expenses will likely continue to occur, regardless of the individual's employment classification.
There is some good news: As long as an individual still has 1099 income from some source related to their business, they will be able to deduct some expenses. They will not, however, be able to deduct any expenses related to income earned as a W-2 employee.
This becomes especially problematic for voice actors who, more often than not, have their own vocal booth that they have invested in for their career. The home office deduction is also a significant benefit that will be reduced if no income is from 1099s, as California home expenses make up a large portion of household expenditures and it allows a percentage of the home's expenses to be deducted for business purposes. If there is a portion of 1099 income still available, this deduction will still be available but ONLY up to the total of the 1099 income, which can become difficult to reach without large contributions that would typically be paid from large studios through payroll companies.
Why is this happening?
Why is this happening?
We may not know for sure the reasoning behind this decision, but likely it is to target high-earning individuals who utilize the S-corp status on their tax returns to reduce the payroll tax liabilities owed. S-corp status limits the amount of money that is designated as taxable wages, subject to payroll taxes, by paying the owner a "reasonable wage" for their services to the business. The remaining income earned by the business is paid as a distribution to the individual, effectively shielding it from 7.65% in payroll taxes. By requiring this income to be reported as wages, the amount of money to be gained by the state for their own programs, such as their underfunded unemployment coffers, will be drastically increased.
What now?
What now?
As an opinion piece, I personally do not see this standing up to muster. Per rules to designate someone as an employee vs. a contractor, there are factors that have to be met to establish the degree of control and independence of an individual completing a job, which will define their role in a company. Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Source: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
These can and have been met with some business relationships for actors. For example, it would be difficult to argue that a payroll company, or even a studio, has the right to control what an actor does. Unless one is required to work on their projects exclusively or are required not to take on additional work while working on their jobs, the Behavioral category would not be met. As for the Financial category, many voice actors are required to provide their own equipment to record. This could be met if the studio provides the equipment for the actor at their own studio. Finally, for the Type of Relationship, the key to this being met would be a continuous relationship with the actor. If they are providing consistent work, this can easily be identified as an employee/employer relationship, especially if they are not taking much, if any, outside work.
There is still a great deal of uncertainty surrounding this situation, but more details will likely unfold in the coming days. More details will be provided as the situation unfolds.
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