Wage with holding

Wage withholding is a difficult one in the entertainment industry because of the vast range of employment arrangements, the various creative payment structures, and the impact of union and guild requirements. Federal and state taxing authorities have become extremely aggressive in seeking to treat entertainment industry workers as employees, thus subjecting all payments to wage withholding.

Wage withholding applies only to payments to employees, not to payments to independent contractors. In general, determining a workers status as employee hinges on whether the employer has the right to control the manner and means of accomplishing the desired results. The right to control can be determined based on the terms of the contract between the parties, although the contract terms are not conclusive. The right to control can also be determined from industry custom and practice. The determination depends on the facts and circumstances of each case. The following sections discuss classification issues of various types of workers in the entertainment industry.

Directors. Under standard industry practice, directors are under the control of the producer and are treated as employees of the production company. Directors would probably be treated as employees under the expansive definition of employee applied to other areas.

Commercial production company workers. Many production companies produce commercials or training films that usually take less than a week to produce. Such companies commonly assemble a company team to complete each production. This company is typically highly specialized workers and need very little direction from the production company. The company generally brings their own equipment, advertise in trade journals, and have their own offices. If a non tax case, the National Labor Relations Board held that company s were not employees of the production company. Although the decision was a labor union case, it applied the same common law test as is applied for tax purposes.

Writers. A common problem is the determination of employee status of writers who are retained to write a script but who are given broad latitude so to what and how they write. Typically, writers work at home on their own time. Sometimes a contract will call for a script on a general topic, with a limited number of required rewrites or polishes at the request of the producer. The determination of employee status requires consideration of a number of factors.

Performers. The service has ruled that actors, narrators, singers, and musicians on radio and television productions and commercials are employees because of the level of direction and control to which they are subject. It is likely that these rulings would apply to performers on motion picture productions as well.

Loan-out corporations. A common problem is determination of employee status of one person loan out corporations.

Penalties. If a workers status is converted from an independent contractor to an employee, the employer will be liable for failure to withhold.

Expense reimbursements and advances:

A common question is whether withholding and reporting are required for payments to employees for expense reimbursements or advances. The service released a series of regulations that exclude payments under a qualified accountable plan from the requirement of withholding and reporting. Thus, neither the employer nor the employee need report such payments as income to the employee, and the employer, not the employee, is entitled to a deduction for the reimbursed expenses.

In order for an expense reimbursement or advance arrangement to qualify as an accountable plan, the arrangement must meet all of the following tests:

The expenses that are reimbursed must be deductible by an employee. For example, expenses that would not qualify include (a) meal expenses (b) commuting expenses; and (c) business clothing expenses, except to the extent that the clothing would never be worn off the job. In addition, the expenses are subject to the general requirement of not exceeding an amount that is ordinary and necessary.

The employee must be required to substantiate the reimbursed expenses to the employer. For example, the payment of a box rental or tool allowance will not qualify if it is paid to all employees and if no accounting for the reimbursement is required. However, the service permits deemed substantiation with respect to travel and meal expenses up to specified modest limits that are set forth in revenue procedures published from time to time by the service. In this case, the taxpayer need substantiate only the travel, not the precise expenses.

The employee must be required to return any advance or reimbursement in excess of substantiated expenses to the employer within a reasonable period.

Foreign production:

For federal tax purposes, a foreign corporation is fully subject to all withholding requirements when it pays compensation for services to a United States citizen or resident, even if the services are rendered offshore and even if the corporation does not engage in any trade or business in the United States. The only two exemptions are for compensation paid to United States citizens that is subject to withholding in the foreign country or compensation that is exempt from tax.

If the employee is a California resident, California withholding is required, even if the services are rendered outside of California and even if the payer is a non California corporation. In addition, California workers compensation applies if the employee is physically present in California at the time the agreement for the services is entered outside of California to a non-California corporation. These rules apply regardless of the employers country of incorporation. Thus, the same result will obtain regardless of whether a payroll service is used.

Contengent compensation:

It is common for talent to receive contingent payments based on the success of a film on which the talent worked. These payments are treated as compensation, not royalties, regardless of what they are called in the contract, and are subject to wage withholding.

It is common for these contingent compensation payment obligations to be assumed by the film distributor, who then makes payment directly to the talent. Under the assignment of income doctrine, these payments should be characterized as if they were made by the distributor to the producer in consideration for the film rights and then paid by the producer to the talent as deferred contingent compensation. Deferred contingent compensation is subject to the same withholding as applies to all deferred compensation. The producer is liable for any failure to withhold on the contingent compensation payments, and because the distributor makes payment directly to the talent on behalf of the producer, the distributor is also liable for wage withholding as the payroll agent.

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