Tax and Compliance: What to Know About Working with a Loan-Out Company
Many productions use loan-outs to bring on talent or crew. While these service contracts place significantly less tax burden on productions when it comes to payroll tax, some states impose a state tax on loan-out payments, and productions must follow several steps to be compliant. So, what are loan-outs, and which states have special laws that apply to them?
This post will explain what a loan-out is, how one works, and what productions need to do to proactively remain compliant with state loan-out laws across the US.
A brief explanation of loan-outs
Loan-out corporationss allow productions to hire positions—typically actors or department heads—through a separate company rather than hiring the individual directly as an employee. Loan-outs are set up as a separate legal entity (a C or S corporation or LLC, taxed as a C or S Corporation) and are hired via a contract that’s signed by both the production and the business entity the worker is employed through (the owner of the loan-out). Both parties agree to terms, including the scope, type and duration of work, and rate of pay, before signing.
Advantages of employing a loan-out benefit both the crew member and the production:
- Talent or department managers hired through a loan-out benefit from certain tax advantages. For example, these workers can deduct business expenses and take advantage of certain tax credits that are not available to direct-hire production employees. However, a loan-out worker is responsible for managing their own business expenses and filing taxes as a separate legal entity.
- On the production side, hiring contract workers through a loan-out reduces a production’s liability and administrative burdens, passing payroll tax, benefits and other employee-related expense obligations to the loan-out company. However, productions do have some legal reporting obligations in certain states, and that’s what we’re going to talk about now.
States that impose tax for loan-outs
Ten states—including Colorado, Georgia, Hawaii, Louisiana, Massachusetts, Mississippi, Montana, New Jersey, New Mexico, and Puerto Rico—impose loan-out taxes. Most require loan-outs to register with the Department of Revenue, Secretary of State, or both, prior to working with a production in that location.
In order for non-resident performing artist loan-out companies to qualify for the production company’s incentive, tax needs to be deducted from payments. And it’s the loan-out owner’s responsibility to register their company with applicable entities within the state or territory.
Here’s how each applicable state manages loan-out requirements for film incentives:
- Colorado imposes a 4.40% work state withholding tax. If you’re employing a loan-out in Colorado, call tax support at (818-489-7333) or firstname.lastname@example.org for help with setup.
- Georgia imposes a 5.75% tax and requires loan-outs to register with the GA Department of Revenue using their Federal Employer Identification Number (FEIN). Productions employing loan-outs in Georgia must give EP access to their ‘Misc WH account.’
- Hawaii imposes a 4.50% tax (4% in Maui) and requires loan-outs to register with both the Hawaii Department of Taxation and the Secretary of the State. EP needs your production company name and associated FEIN, full mailing address, as well as the Hawaii Department of Taxation account number and each loan-out’s General Excise Tax (GET) number.
- Louisiana imposes a 4.25% tax but does not require loan-outs to register with the Department of Revenue or Secretary of State, or use the loan-outs FEIN to pay or deposit the withholding tax. Withholding tax will be reported using your film incentive account.
- Massachusetts imposes a 5.00% tax which increases to 9% after the loan-out is paid $1 million dollars. Loan-out companies must register with the Massachusetts Department of Revenue and the Secretary of State. Loan-out tax is managed using the production’s MA account number and project name.
- Mississippi imposes a 5.00% tax, which is reported under the payroll provider’s account. No loan-out registration or FEIN is required.
- Montana imposes a 6.90% tax. Loan-outs must register with the Montana Department of Revenue but not the Secretary of State. EP will need your production number as well as your certificate letter of approval from the Montana film incentive administrator and the affiliated certificate number.
- New Jersey imposes a 6.37% tax and requires loan-outs to register with the New Jersey Division of Taxation and Secretary of State. Productions must provide EP with the production account number, the pin number used to access the account, your FEIN, and the name of your production company.
- New Mexico imposes a 5.90% tax and requires loan-outs to register with both the New Mexico Department of Taxation and Revenue and the NM Secretary of the State. EP will need your production company name and associated FEIN, full mailing address, and Department of Taxation account number, and each loan-outs General Excise Tax (GET) number.
- Puerto Rico imposes a 20% tax. Loan-out companies are not required to submit any state business filing. Tax reporting is handled within our EP account.
States that impose tax on loan-outs who neglect to register
Three additional states—California, North Carolina, and South Carolina—impose a tax on loan-outs only if they don’t register with the Secretary of State.
- California imposes a 7% tax on loan-outs that do not register with the CA Secretary of State but does not require loan-out withholding for registered businesses.
- North Carolina imposes a 4.75% tax on loan-out companies that do not register with the NC Secretary of State.
- South Carolina imposes a 2% tax on loan-out companies that do not register with the Secretary of State.
It’s important to note that loan-outs should not register with the Secretary of State if the production that the company is hired by is using a North Carolina or South Carolina film incentive.
States that require loan-out wage payment withholding
Lastly, three states—Kentucky, Illinois, and Pennsylvania—require loan-outs to register with the state for film incentive purposes and to withhold tax on wage payments made to the owner.
- In Kentucky, each loan-out has to register with the Department of Revenue and Secretary of State. Loan-outs also have to manage Kentucky employee payroll withholding and remit deposits. Loan-out companies must fill out this form and give it to the production once filming ends.
- Illinois requires loan-outs to register with both the Department of Revenue and the Secretary of State. The production may use state registration information to monitor loan-out employee wage and tax reporting.
- Pennsylvania requires loan-outs to register with both the PA Department of Revenue and the Secretary of State. The production may use state registration information to monitor loan-out employee wage and tax reporting.
Loan-out withholding is nuanced, but EP can help
As you can see, the way loan-out taxes are imposed and managed in different states varies greatly. Protect yourself from making errors by enlisting the help of EP’s tax experts to help you manage, simplify, and streamline all your payroll tax needs—including loan-out taxes. Click here to learn more.
This blog contains general information we are providing on a subject that may be of interest to you. Nothing in this blog should be considered tax advice. You should consult with your tax or legal advisors regarding the applicability of any of these rules to your specific circumstances and how best to handle them.