Some TAG members may have heard that the California Employment Development Department (EDD) might soon stop recognizing Loan Out Companies and require employers to pay for services directly to contracted employees. This news followed an audit of payroll service Cast & Crew, which sent notices that the EDD will require employers to pay for services directly to contracted employees and not to employees through a Loan Out Company. We would like to share some information to clarify this situation:
What is a Loan Out Company?
Typically, a Loan Out Company (or Loan Out Corporation) is a Limited Liability Company (LLC) owned by one individual. This lets a contracted worker provide services as an employee of their own Loan Out Company. Rather than pay an individual directly, the employer pays the Loan Out Company, which in turn pays the individual. In effect, the individual is paying themselves a salary from their own Loan Out Company.
Does AB5 affect Loan Out Companies?
Passed in 2019, AB5 is a California Supreme Court verdict that addressed independent contractor classification. Members of The Animation Guild are not independent contractors when they work for a Union signatory; they are considered employees, regardless of if they are working through a Loan Out Company. You can read more about AB5 here.
Should You be worried?
If you do not have/use a Loan Out Company, this situation does not affect you.
If you do have/use a Loan Out Company, the EDD issued a statement: “We have received various inquiries highlighting questions about loan-out corporations’ ability to operate in California. As we have previously stated, EDD is not taking action to ban these companies in California.” Read the full statement here. While the status is stable for now, you should always work with an accountant if you are employing yourself through a Loan Out Company to ensure that you are properly paying your payroll taxes.