California’s new bill safeguards Hollywood’s loan-out companies

A new law to protect the entertainment industry’s unique payroll structure

In a significant move for the entertainment industry, California Governor Gavin Newsom has signed a bill that ensures the protection of loan-out companies, a crucial element in Hollywood’s payroll system. This legislation comes in response to a state audit earlier this year that threatened the long-standing financial arrangements of actors, writers, and crew members.

The traditional payroll setup in Hollywood

For decades, creatives in the entertainment industry have not been treated as direct employees of major studios. Instead, they are compensated through their personal service companies, which “lend” their services to the studios. This setup allows these professionals to deduct various expenses, such as agent and manager commissions, from their income tax, providing significant financial benefits.

However, this arrangement was called into question in May when the California Employment Development Department (EDD) conducted an audit of Cast & Crew, a major payroll services company in the industry. The audit was triggered by a surge in unemployment claims from entertainment workers during the COVID-19 pandemic, which led the EDD to scrutinize whether loan-out companies had been paying the required payroll taxes to support the unemployment insurance system.

The EDD’s stance and industry response

Cast & Crew, which distributes checks to loan-out companies on behalf of studios, found itself at the center of the audit. The EDD argued that Cast & Crew, rather than the loan-out companies, should have been responsible for paying payroll taxes. This position alarmed Hollywood unions, who warned their members that the EDD’s actions could fundamentally transform the industry’s business practices.

In response, the EDD clarified that it was not seeking to ban loan-out companies but was focused on ensuring proper tax collection. This clarification did little to ease industry concerns, prompting Newsom’s office and key stakeholders to work behind the scenes on a legislative solution.

Legislative action and the new bill

Senator Anthony Portantino, a strong advocate for the entertainment industry, introduced SB 422 in the final days of the legislative session in August. The bill, which Newsom signed on the last day to act on legislation, codifies the loan-out structure in state law. It explicitly states that loan-out companies, not payroll services like Cast & Crew, are responsible for paying payroll taxes.

To facilitate tax collection, the bill mandates that payroll companies file quarterly reports to the EDD regarding payments to loan-out companies, starting in 2026. This measure aims to ensure transparency and compliance without disrupting the industry’s established practices.

Industry reaction and future implications

A coalition of Hollywood unions expressed strong support for the bill, stating that it would prevent any upheaval in the industry at a time when many members face significant challenges and unemployment. Cast & Crew executives, who had been challenging the EDD’s determination in a closed-door tribunal, welcomed the legislative fix, which affects approximately 2,000 loan-out companies.

The new law represents a critical victory for the entertainment industry, preserving a payroll structure that has been integral to its financial ecosystem. By ensuring that loan-out companies remain responsible for payroll taxes, the bill maintains the status quo while enhancing tax compliance and transparency.

Looking ahead

As the industry continues to navigate the complexities of tax regulations and employment structures, this legislative action provides a stable foundation for future operations. The collaboration between government officials, industry stakeholders, and unions highlights the importance of proactive solutions in addressing regulatory challenges.

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