Question:
As a feature film editor my wife has the option of working as a loan out company. There are several confusing aspects in making a decision. Such as, can she collect unemployment when not working? Are pension benefits accrued under her name or does she give them up? Are there other welfare benefits she would give up by working as a loan out company?
Answer by Brandon Blake, Entertainment Lawyer:
Loan-out companies are a great way to reduce tax exposure and to avoid the pitfalls of the alternative minimum tax and self-employment taxes. Generally the only reason that people working in the entertainment field do not form loan-out companies is when the hiring company does not allow them. Before electing to work as a loan-out, you will need to have an entertainment law firm like ours organize the loan-out company.
In this question the studio has already provided the option of working as a loan-out. Although particular facts vary from case to case, and there is not going to be a way to provide one answer to every different situation, I would say that in almost every case I have reviewed it has been substantially to the benefit of the client to choose loan-out status rather than employment status.
The primary reason comes down to taxation, and more specifically the issue of business expenses. When you are an employee you do not have the option of taking business expenses out of your calculation of income. The amount reported on your W-2 is your income and the only way to reduce your tax bill is through deductions. There are various deductions for business expenses, such as the home office deduction, and others. But the problem is that these deductions are only partial, allowing you to take a portion of the expenditure off of your tax bill, but not allowing you to reduce the size of the income figure itself. Moreover, higher income individuals will reach the alternative minimum tax, in which case most of the business deductions are then eliminated, meaning that money spent on things like vehicles, business supplies, inventories, and office space is being paid for with after tax money. Essentially you are being taxed on your revenue, not on your profit.
The loan-out company allows the individual to run in the same way that a company runs, which means the costs of doing business are taken out and the company only pays tax on the profits. This makes sense because no one expects a major corporation to be paying income tax on money it is paying out for office space or for the raw materials it uses in the course of business. So why should an individual be forced to pay tax on the materials that he/or she must purchase in the course of business?
When I counsel clients who have always worked as employees on the differences between loan-out and employment status, it often takes a while for the client to get his or her head around just what a big difference it will make to the tax bill. Then once the client gets it, there is often regret at not having switched years earlier.
I have spent a lot of time talking about the upside, but there are a few downsides too. One of those is unemployment insurance. In order to maintain unemployment insurance, you will need to pay yourself a fair salary. That means a portion of the money that flows into your loan-out will need to be paid to yourself, with the traditional withholdings and deductions.
Regarding the other questions, pension benefits will depend entirely on your guild rules so check with the Pension Health and Welfare people. Regarding other types of welfare benefits, generally those are tied to showing previous employment, which would still be possible with a loan-out.
I have been setting up loan-out companies for clients for over 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). The reason to have a loan-out set up by an entertainment law firm like ours is that we can make sure you can take advantage of every possible tax benefit, and also ensure that your entertainment business is in compliance with federal and state tax law, saving you tax penalties and accounting fees in the long run. Feel free to contact us for a quote.