California's AB5 Law Threatens Film and TV Workers Who Use Loan Outs

As a writer, I formed a loan-out company so that when I am hired to write film and TV, companies actually hire my company. Then, I can send myself wages for those jobs as needed. The rest of the money stays in the corporation, and I can pay myself accordingly with it.

This practice has been going on in Hollywood for years, and is a great way to manage your money, have write-offs, and allow writers, directors, actors, and IATSE members to budget accordingly for the fat and lean years.

But now, the California Employment Development Department (EDD) is coming for loan-outs, and this could quite possibly destroy the way the majority of how Hollywood does business and have serious ramifications for everyone in the industry.

It may even cause Hollywood to leave Los Angeles.

The EDD is scrutinizing the tax policy for loan out corporations in the entertainment industry by changing the rules for loan out corporations. The EDD says it will determine the use of loan out corporations on a case-by-case basis.

But the WGA, IATSE, DGA, PGA, and SAG-AFTRA have not released any public statements on whether or not their members will be able to use loan-outs under these new rules.

Payroll service Cast & Crew sent an email warning people who have used them in the past that they can no longer pay loan outs, thanks to this law.

So, what are these law changes?

A change to the tax treatment of these corporations could mean that entertainment employers would have to pay creatives as employees and not as independent contractors. This would require withholding income taxes and paying employer taxes. These taxes would be much higher than what people are used to paying, so it would take income away from people trying to survive in one of the most expensive cities in Los Angeles.

This would also affect lots of people in other industries who use these kinds of companies to do business.

The annoying this is, none of this makes any sense.

Loan-out corporations already pay W-2 wages to their owners. The California Employment Development Department's decision to not recognize loan-outs for payroll purposes means studios would have to pay these corporations directly. Due to the logistical challenges this presents, studios are likely to reject using loan-outs altogether.

This could severely disrupt the entertainment industry and needs immediate resolution.

And the other giant thing is, other states will not have this law. So why would Hollywood workers stay and have businesses in Southern California if they'd be paying more taxes to live in a more expensive place? Especially if work then moves out of state as well.

The law is much more complicated, but basically, California Assembly Bill 5 (AB5) is a law that went into effect on January 1, 2020, that requires companies to reclassify independent contractors as employees.

The law applies to all workers in California, regardless of where the employer is based. Since that passed, the law has been a disaster. It needed lots of changes and exemptions, as many gig workers lost a ton of income as companies just didn't hire them or fired them to avoid paying the taxes and benefits the law required.

We'll keep you updated as this progresses.