Most people don’t know the difference, but you will…
Whether you’re producing your own film, and it’s your company on the line, or whether you’re a work-for-hire producer/UPM for another company, it’s important you understand the difference between an Independent Contractor and an Employee, and also what it means when an employee has a Loan Out. Why you might get into trouble by paying an employee as an independent contractor, and how worker’s compensation plays into either scenario.
Most companies (even BIG companies!) don’t understand the difference, and many are violating labor laws and don’t even know it. Other’s know it’s wrong but do it anyway, since they figure their chances of being penalized are slim to none. However you go about managing your business, it’s important that you understand that there is a difference, and what that difference is!
Why it’s important to know the difference
Well… to start with, you might be violating Federal and State Labor Laws, and you need to appreciate the fact that by producing a feature film (even with a skeleton crew), you are becoming an employer. As an employer, you have responsibilities you need to be aware of — and you don’t want the IRS reminding you of it! For example, when hiring employees, you’ll need to pay employer taxes, withhold taxes from checks, send out W-2’s, provide worker’s compensation, abide my labor laws such as overtime and meal penalties, etc.
When hiring an independent contractor, there’s a lot less to worry about — you simply pay them a flat fee for a service. No withholdings, no additional employer taxes, and if they’ve earned $600 or more, you just send them a 1099. So since it’s easier and cheaper to hire contractors, many producers do just that.
The problem is, a worker’s status is not your decision to make. That will be determined by federal and state agencies,
and if they determine that you made a mistake, you can be liable for that.
So how do you determine the difference?
There are three factors the IRS looks at:
- Behavioral Control
- Financial Control
- Relationship of the Parties
The biggest factor that the IRS looks at, when determining whether a worker is an Employee or Independent Contractor, is Behavioral Control (how much control the employer has over the work being done.) If a worker has complete control over where and when he/she does the work, then he/she is most likely to be an independent contractor. If the time and place is being dictated by an employer, then the worker is most likely an employee.
To illustrate, if you hire a carpenter to make you a cabinet; he quotes you a price, goes away and comes back within a week with the cabinet, he’s properly classified as an independent contractor. However, if you hire a carpenter to make you a cabinet, but you mandate he do it from the hours of 9AM – 5PM at your workspace, using your tools, and he/she will be under your direct supervision, (even if the end result is the same cabinet at the same price), the worker in this case should be classified as an employee.
Since your crew is receiving a Call Sheet telling them where to show up and at what “call time”, it is the producer who has control over where and when the work is being done, and therefor the crew should be classified as employees.
You could argue for some exceptions, such as a producer or an editor. It is possible that either of these are performing the work on their own time, in their own space, and are delivering a service (even if it has to be approved by the client) as a contractor.
Financial Control refers to whether the worker is responsible for his/her own financials during the course of the work. If so, the worker is more likely an independent contractor. If the employer is entirely responsible for the financials of the work being done, then the worker is more likely an employee.
The Relationship of the Parties refers to what is being understood between the two parties to be the case. For example if the contract clearly states that the relationship is that of an “independent contractor”, then that helps, BUT it is not in itself sufficient. If a contract reads “independent contractor” but the employer clearly has both Behavioral Control and Financial Control, then the worker will be determined to be an employee.
A Closer Look at Employees
- Employees need to fill out a W-4, when filling out their start paperwork.
- When they receive their checks, the employer has to withhold taxes (such as Medicare, Federal Unemployment Insurance, State Unemployment Insurance, etc.)
- On top of the withholdings, employers also have to pay payroll taxes (which are part of the fringes we budget for.)
- Employees are owed overtime pay at the state mandated rates, as well as meal penalties if they are not given a meal break within 6 hours.
- Employers are also legally required to provide employees with Worker’s Compensation.
- Come tax season, the employer needs to send out a W-2, stating the employees gross wages for the tax year.
It would be a nightmare to have to manage all of this on your own, and that’s why there are entertainment payroll companies out there that do all of this for you. They provide you with the Start Forms (including a W-4), which they need to process an employee’s checks. They cut the checks, do the withholdings, make sure those withholdings are paid to the appropriate agencies, they do the same for the employer’s taxes on top of the withholdings, and they also provide worker’s compensation for each employee they process. Finally, come tax season, they send out W-2’s to all your employees. So this process, really shouldn’t be all that daunting to a producer when they hire a good entertainment payroll service!
Independent Contractors are essentially treated as a separate business that your company is hiring for services, so:
- A contractor will fill out a W-9 instead of a W-4
- No taxes need to be withheld from their checks, (so you can easily just write them a check from your business checkbook)
- No employer taxes are due on top of these checks, since they are not your employee
- You don’t owe them any overtime or meal penalty, since they are responsible for controlling their own time
- Technically, contractors should have their own worker’s compensation. But to be on the safe side, you should use best practice and purchase worker’s compensation from your insurance company to insure independent contractors working on your project.
- The employer sends out a 1099 instead of a W-2
Again, just because it’s easier to pay an independent contractor, don’t turn a blind eye to laws that might come back and bite you. Also, note, that most producers forget to collect a W-9 at the start of work, and to send out a 1099 come tax season. Remember that your payroll company will not be keeping track of your independent contractors, so it will be the producer’s responsibility to learn how to write and send out 1099s.
There is one more interesting exception that you’ll find, and that is
Often above the line personnel have Loan Out companies. In this case you hire someone through their company (that company “loans” them out to you), and despite the fact that the employer has complete Behavioral Control and Financial Control, since the worker has a Loan Out company, they will still be treated as an independent contractor.
- They will fill out slightly different start paperwork
- Checks will be made out to their Loan Out company, and not the worker directly
- As such, the employer won’t need to withhold taxes
- The employer won’t have to pay employer taxes
- Loan Outs should technically, like contractors, have their own workers compensation. But you should also cover them to be on the safe side. Double check with your Payroll company if they will cover workers comp for the Loan Out, and otherwise have the WC from your insurance package cover them,
Loan Outs are often pretty great for both parties because the producer on the one hand doesn’t have to pay employer’s taxes, and the worker on the other hand doesn’t have to have any taxes withheld from their checks. This doesn’t mean the worker won’t have to pay taxes. It’s very important that everyone understand that the only difference is that the employee pays his taxes upfront (by way of withholdings) and a contractor pays his taxes when it’s time to fill out tax returns.
If you’d like to learn more about this topic, I HIGHLY recommend checking out this book. It has a FANTASTIC chapter on all of this, and covers a bunch more subjects equally as important for any filmmaker to know. You can also download a quick PDF guide from the IRS website on Independent Contractors vs Employees.