Newsom Signs Bill Protecting Entertainment Industry Loan-Outs, Affirming They Must Pay Payroll Tax

Gov. Gavin Newsom signed a union-backed bill on Monday that protects loan-out companies, which had been threatened by a state audit earlier this year.

Actors, writers and crew members are typically not treated as employees of the major studios. Instead, they are paid through their personal service companies, which "lend" their services to the studios.

That set-up, which has existed for decades, allows creatives to deduct agent and manager commissions and other expenses from their income tax. But in May, the arrangement came into question when the California Employment Development Department conducted an audit of Cast & Crew, one of the major payroll services companies in the industry.

The EDD had received a flood of unemployment claims during the COVID-19 pandemic, including from entertainment workers who were sidelined during an industrywide shutdown.

In response, the agency conducted audits to determine whether loan-out companies had actually paid the payroll taxes that support the unemployment insurance system, as required by law.

Cast & Crew distributes checks to loan-out companies on behalf of its clients, the studios. In the audit, the EDD took the position that Cast & Crew — not the loan-outs — should have been paying the payroll taxes.

Cast & Crew alerted the Hollywood unions in May that the EDD was essentially disregarding the loan-out structure, and treating workers as employees of Cast & Crew. The unions in turn warned their members that the EDD was seeking to "fundamentally transform" the way the industry conducts business.

That raised further alarms, prompting the EDD to issue a statement saying it was "not taking action to ban" loan outs, but rather was trying to ensure that all taxes are collected.

Newsom's office and industry stakeholders then spent the next several months behind the scenes hammering out a solution.

Sen. Anthony Portantino, D-Burbank, a key ally of the industry in Sacramento, introduced and passed a bill, SB 422, in the final days of the legislative session in August. Newsom signed the bill on Monday, the final day to act on legislation.

The bill codifies the loan-out structure in state law. The bill also makes clear that loan-outs — not payroll companies — are responsible for paying payroll taxes. To aid in tax collection, the bill requires the payroll companies, like Cast & Crew, to file quarterly reports to the EDD regarding payments to loan-outs, starting in 2026.

In a statement supporting the bill, a coalition of Hollywood unions said that it would "prevent any upending of our industry at a time when we face huge upheavals and the unemployment of many of our members."

Cast & Crew executives told Variety in May that the audit affected about 2,000 loan-out companies. At the time, Cast & Crew was challenging the EDD determination in a closed-door tribunal before an administrative law judge.

The 2,000 companies were expected to be sent notices informing them of the audit. That never happened, however, as the stakeholders instead worked out a legislative fix to the issue.

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