In response to entertainment and tax industry inquiries regarding loan-out corporations, the EDD has clarified that it “is not taking action to ban these companies in California.” However, the EDD failed to provide any real guidance as to how owners of the loan-out corporations can qualify to be treated as employees of the loan out corporation and not the employee of the business that contracts with the loan-out corporation.
California’s ABC test was designed to ensure that most workers are classified as employees of hiring businesses, unless specified exemptions apply. For purposes of loan-out corporations involved in the entertainment industry, the business-to-business exemption and the professional services exemption may possibly apply in various scenarios. There are also provisions of California’s Unemployment Insurance Code that may provide some relief. However, these exemptions are very fact specific and leave many loan-out corporations targets for extensive and costly audits.
We will cover the various options that loan out corporation owners may want to explore to ensure they are complying with California law in terms of ensuring that they are not treated as employees of hiring businesses in an upcoming issue of Spidell’s California Taxletter® as well as our Federal and California Tax Update seminars and webinars. Nonetheless, this is clearly a very gray area, and we will continue to report as news develops.
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