IRS Guidelines - Film & Video Industry Contractors
Governing Employee-Contractor Issues in the Film and Video Industry
The following guidelines may not take into account any recent changes in IRS regulations. Be sure to consult your tax advisor or attorney to determine how the following guidelines may apply to you. The following information is believed to be accurate, but Media Communications Association-International cannot be held responsible for any inaccuracies or changes that may have taken place.
The IRS has developed a set of internal audit guidelines designed to remove much of the subjectivity from the issue of who is an employee and who is an independent contractor. The guidelines are founded on the 20 Common Law Factors for determining worker classification, but much more objectively delineate how these factors are to be applied, and which ones are most relevant.
The new IRS guidelines provide ways for production companies and corporations with video departments to better determine whether the workers they hire are their employees, or whether they are independent contractors. Further, the document provides criteria to assist contractors in operating their independent businesses.
The purpose of these guidelines is to enable examiners to make accurate and consistent determinations of employee/independent contractor status in the Television Commercial Production and Professional Video Communication industries (collectively the "Industry")(1) Traditionally, the Internal Revenue Service (the "Service") has made employee/independent contractor determinations based upon the "twenty factors."(2) These factors have evolved over the years from case law applying the common law standard of the "right to direct and control." The factors have, however, been criticized as ambiguous and subjective. In addition, the same twenty factors have often been applied without regard to differences in occupations or industries that make certain factors more significant than others.
In order for examiners to make accurate and consistent determinations of employee/ independent contractor status for any market segment, the Service must look closely at the market segments to understand how it operates. In this way, the factors that best demonstrate whether the requisite control is present can be identified. In addition to permitting the Service to use its resources more efficiently, identification of these factors will also help taxpayers in the market segment better understand the tax law, and therefore, better comply with (0)(1) the proper classification of workers. The belief that a better understanding of the tax laws promotes taxpayer compliance is embodied in the Service's Compliance 2000 program.
To accomplish these objectives, the Service has engaged in a series of meetings with Industry representatives to better understand the Industry. The Industry in the United States consists of thousands of production companies with tens of thousands of workers and billions of dollars in revenues. Because of the wide variety of jobs in the Industry, it has often been difficult for both the Service and the Industry to agree upon determinations of worker status. In addition, customs and practices have evolved differently in different parts of the country, further complicating the determination process.
There is substantial evidence that audits in the Industry consume considerable taxpayer and Service resources and sometimes result in substantial liabilities of companies that made good faith efforts to classify workers. While there is a procedure for obtaining a classification ruling from the Service using Form SS-8, there are many instances where it is impractical to obtain such a ruling, and the use of a ruling is inefficient in resolving issues that recur on a frequent basis. Both the Service and the Industry therefore realized that a Compliance 2000 approach would afford an opportunity to promote compliance within the Industry while permitting Service resources to be used more efficiently within the framework of the common law standard.
These guidelines, which have been prepared in consultation with Industry representatives, do not provide this industry, or any industry, special treatment or tax advantages. Nor do they eliminate or alter the legal standard of the "right to direct and control." Rather, they are intended to identify those factors that are clearly more significant than others in determining control in a specific market segment and to establish wherever possible, objective standards for determining whether these factors are met.
However, in the event a taxpayer in the Industry does not agree with an examiner's determination made in accordance with these guidelines, the examiner will need to perform an analysis of all 20 factors. This is needed in order to ensure that the examiner's file contains all the relevant data that may be necessary in order to respond to the taxpayer's challenge of the determination.
In addition to the worker classification issue addressed by these guidelines, there is an additional compliance issue concerning the reporting by companies to the Service of payments made to workers. A company that treats a worker as an employee is required to report the wages on Form W-2 and a company that treats a worker as an independent contractor is required to report payments (if they equal or exceed $600 in a year) on Form 1099. While these reporting requirements are analytically separate from the worker classification issue, an examiner should confirm that payments have been reported for all workers, even if they have been misclassified.
These guidelines have been reviewed by the Office Chief Counsel of the Service to ensure that the factors selected are consistent with existing revenue rulings. Revenue rulings that are directly relevant are included in Appendix A.
The Industry consists of two basic segments - the Television Commercial Production Segment and the Professional Video Communication Segment. A description of the two groups follows.
A. Overview of the Television Commercial Production Segment.
There can be little doubt that all Americans are familiar with television commercials. These commercials, after all, are the principal means of financial support for the national television networks and local television stations, both broadcast and cable. A typical hour of broadcast television includes anywhere from nine to thirteen minutes of television commercials. Thousands of new television commercials are produced and shown throughout the United States every year.
The vast majority of television commercials originate from advertising plans developed by advertising agencies on behalf of their clients. Once an advertising agency and its client have determined that the client's interest will be served by advertising on television, the agency will then typically have its in-house staff or a freelance writer prepare a script for a proposed commercial. When the script has been approved by the client, the physical production of the commercial can then begin. After the production of the commercial has been completed, post-production work, such as the addition of music and titles and the editing of the film, is typically handled by the advertising agency.
While some advertising agencies have in-house production staffs, the vast majority of commercials are produced by independent production companies which generally have the production of television commercials as their sole business. While the greatest concentration of these companies is in the Los Angeles and New York areas, there are independent commercial producers in virtually every major city in the United States who can serve the needs of advertisers.
In some cases, the advertising agency will solicit bids for the commercial production from a number of commercial producers and in other cases the advertising agency will contact a particular production company and negotiate a price for the commercial production. Where bids are solicited, the production companies generally use a standard bid form which details the anticipated budget for the production. It should be noted, however, that the production of a television commercial is a highly creative process. Virtually every commercial production requires that a substantial number of people with specialized skills be brought together to combine their skills in the creation of the final product. While advertising agencies are certainly mindful of cost factors, an agency will not necessarily select the production company making the lowest bid if it feels that another company can produce a commercial which is technically and/or creatively superior.
B. Overview of the Professional Video Communication Segment.
Professional Video Communication includes corporate video productions (typically used for training, employee communications, sales and marketing, public service and public relations) and other video productions generally not intended for exhibition on publicly available television. Generally, projects are created for a corporate or organizational client, by either (a) an in-house production staff, (b) an outside production company, or (c) in many cases a combination of both. Either the in-house staff or the outside company often engages additional workers on a project-by- project basis. Professional Video Communication is done all over the United States.
This segment of the Industry works in many of the same ways as the Television Commercial Production segment but with some important and sometimes subtle differences. For example, Television Commercial Production workers are often part of unions or guilds where job functions are often rigidly defined. In Professional Video Communication production, with the exception of the "talent" appearing in some productions, very few of the workers are associated with a union. Therefore, the job functions are less rigidly defined and it is not uncommon for workers in this segment of the Industry to perform multiple job functions on a particular project. In spite of these differences, the actual production process is similar to Television Commercial Production (albeit less formal) with a group of individuals with specialized skills collaborating to make a creative product for the client. Unlike Television Commercial Production, however, the company which is responsible for the production itself may also be responsible for post-production activities.
The determination of whether a worker is an employee or independent contractor is fundamental to the administration of the federal tax laws. The classification of a worker determines whether the worker is subject to FICA and income tax withholding, whether the employer is subject to federal unemployment taxes (FUTA), whether the worker is subject to limitations on the deductibility of employee business expenses, and the treatment of the worker for purposes of qualified retirement plans or other fringe benefits. For FICA, FUTA and income tax withholding purposes, the term "employee" includes any individual who, under the usual common law rules applicable in determining the employer/employee relationship, has the status of an employee. Internal Revenue Code sections 3121(d), 3306(i) and 3401(c).
Under the common law rules, the key question is whether a business has the right to direct and control a worker as to the details of when, where, and how work is to be performed. If so, the worker is an employee. If, instead, the business merely specifies the result to be achieved, the worker will be in independent contractor.(3)(2)
Because the right to direct and control can be manifested in many ways, the Service and the Social Security Administration developed a list of twenty factors as a training aid.4 These factors, which were later published in Rev. Rul. 87-41, 1987-1 C.B. 296, are not a substitute for the common law standard. Instead, they are simply a checklist or aid that can be used in applying the common law standard. Thus, there is no requirement that all twenty factors be "passed" in order to establish independent contractor status.
Further, factors that are relevant for one specific industry or type of work may be irrelevant or insignificant as applied to another specific industry or type of work. For example, Rev. Rul. 87-41 states that a requirement that work be performed at a set time or place is generally indicative of employee status. However, some types of work must by their nature be performed at a set time or place. In the Industry, workers participating in a "shoot"4 whether employees or independent contractors, must be present at that time. Because the right to specify the time and place at which work is performed fails to distinguish employees from independent contractors in this context, it should be disregarded.
Inappropriate results can also occur if the weight given to each factor does not take into account the way in which an industry operates. This can be illustrated by considering the role of instructions with respect to three broad categories of job functions(6) in the Industry:(3)(4)(5)
Category One: jobs involving overall planning or implementation of the commercial and/or video production;
Category Two: jobs involving planning, design or implementation of specific aspects of the commercial and/or video production, and jobs involving both problem solving and technical skills; and
Category Three: other jobs.
A list of job functions in each category is found in Appendix B.7
In Category One, the worker typically has substantial responsibilities in addition to appearing at the "shoot." These are often performed away from the location. Category Two workers often have some responsibilities away from the location, but these are a smaller percentage of their total responsibilities. Workers in Category Three would do most, if not all, of the work at the "shoot" location. The greater the percentage of time spent at the "shoot," the more likely it is that the worker received detailed instructions about how to perform his or her work. Thus, judging status by looking at instructions while on the location could be accurate for workers in Category Three, but misleading for workers in Category One.
It must be stressed that one should not conclude that a presumption of employee or independent contractor status exists merely because a particular job function is placed in any one of the three categories. Instead, the three categories merely indicate relative individual autonomy, without being indicative of a given worker status. However, in practice, the(6) probability that a worker is an independent contractor will be greater in Category One than in Category Three.
SECTION IV - GENERAL GUIDELINES FOR DETERMINING WORKER STATUS IN THE INDUSTRY
The Service and the Industry have jointly identified three "critical factors" for determining whether a worker within the Industry is properly classified as an employee or an independent contractor. The presence of any of these three critical factors indicates that a worker is an employee, and no further analysis is necessary. If all three critical factors are absent, the worker may be an employee or an independent contractor, and the analysis must proceed to a second level of "significant factors." The significant factors consist of four factors that will generally differentiate between employees and independent contractors. A third group of factors, which bear the least weight, have been deemed to be generally not applicable in the determination of worker status in this Industry.
A. Critical Factors.
There are three critical factors which must be analyzed before a worker can be considered for independent contractor status. While these three critical factors by themselves do not establish the degree of control necessary to treat a worker as an employee under the common law standard, discussions between the Service and the Industry have established that in practice none of these critical factors would be present except in situations where the worker is an employee.
1. Continuing Relationship.
Generally, a production company8 brings together all of the needed personnel and equipment to produce a particular commercial or video and then assembles a different crew for the next project. While some individuals may work on a series of projects, the nature of the Industry is that there is often a substantial change of workers from project to project. This results from the sometimes subtle differences in experience required by various projects, the use of different locations for different projects, and the difficulties in worker availability caused by the inherently sporadic flow of work in the Industry.
In analyzing whether there is a continuing relationship, one should ask whether the worker is hired for an indefinite period or for a specific project with finite duration. If the worker is hired for an indefinite period the worker is considered an employee.(9) If the worker is working on a specific project with a finite duration, the worker may be either an employee or an independent contractor and the analysis should continue. The mere fact that a worker has worked on a series of projects does not mean that the worker has been hired for an indefinite period. In such a case, the examining agent should try to ascertain the true relationship between the company and the worker. In addition to the terms of any written contract (subject to section VI below), the examining agent should determine: (i) whether the worker has been paid for any(7)(8) time not spent on a specific project (which indicates the existence of a continuing relationship); (ii) whether the worker has worked for other companies or (iii) whether the company has used other workers for the same job, (either of the latter two patterns may indicate that a continuing relationship does not exist).
2. Training.
Outside of colleges, technical schools and equipment manufacturer's workshops, training in the Industry is largely an on-the-job experience. There is no economic incentive for a company to provide training to workers who may be working for someone else next week. Workers who need or want formal training usually arrange and pay for it themselves. Therefore, when training is provided for the worker by the company at its expense, it can be assumed that the worker is an employee. If no training is provided, the worker may be either an employee or an independent contractor and the analysis should continue.
3. Guild or Union Benefit Payments.
Many workers in the Television Commercial Production segment (and some in the Professional Video Communications segment) are members of guilds or unions which are subject to the provisions of the National Labor Relations Act (29 U.S.C.). Generally, the collective bargaining agreements between the production companies and these guilds or unions establish various benefit plans such as health plans and retirement plans (sometimes referred to as "Taft-Hartley Plans"). These plans are authorized by 29 U.S.C. §186(c)(5)-(8), which require that the plans be established for the sole and exclusive benefit of employees (and their dependents). The definition of "employee" for tax purposes is the same as the definition for purposes of the National Labor Relations Act.(10)(9)
Therefore, if a company is making contributions to a guild or union benefit plan on behalf of a worker who is not providing services through a loan-out corporation (see Section VII B, below), the worker must be considered an employee. Note, however, that these guidelines do not address the treatment of workers who provide services through loan-out corporations. Thus, the analysis of payments to Taft-Hartley plans on behalf of employees of loan-out corporations is also beyond the scope of these guidelines.
B. Significant factors.
If the worker is not deemed an employee by application of the critical factors, the analysis then proceeds to the consideration of four "significant factors." Based upon discussions with the Industry, it is believed that in most instances an analysis of these significant factors will distinguish between employees and independent contractors. Because of the differences in the nature of the work performed in each of the three categories of job functions appropriate weights need to be given to these factors. A format for this analysis is set forth in Section V, below.
1. Establishment of Business Presence.
One significant indication of the degree of control to which a worker is subject is whether the worker has taken steps to establish a business presence over and above merely being available to render personal services. If so, the worker may be an independent contractor. If not, the worker is generally an employee. A variety of ways in which a worker can establish a business presence is set forth below. The worker does not need to establish business presence through each of the methods listed but may do so through one "strong" factor listed below or through a reasonable combination of other factors. For example, a worker who has obtained a federal tax employer identification number, maintains a business phone, advertises in trade publications, and bills on preprinted invoices has established a business presence. The methods of establishing a business presence include:
(a)Does the worker have an office away from the home, shoot location, and production company? If so, there is strong evidence of the worker having established a business presence. A home office that qualifies for the home office deduction is also some evidence of a business presence, although it is less conclusive than an office outside the production company, home, and shoot location.
(b)Does the worker have a professional agent11 who markets the services of the worker to the public and is paid a commission or other compensation for providing such services? If so, there is strong evidence of the worker having established a business presence.(10)
(c)Does the worker maintain books and records of his/her business activities separate from his/her personal checkbook and other personal records? If so, there is some evidence of the worker having established a business presence.
(d)Does the worker use preprinted invoices, stationery, or business cards with a business name or logo? If so, there is some evidence of the worker having established a business presence
(e)Does the worker have a business phone line used for business purposes separate from his/her personal number? If so, there is some evidence of the worker having established a business presence.
(f)Does the worker advertise in publications, have listings in trade directories or professional publications, or otherwise put his or her name in the public eye as being available for work? If so, there is some evidence of the worker having established a business presence.
(g)Does the worker have a federal tax Employer Identification Number? If so, there is some evidence of the worker having established a business presence.
(h)Is there other evidence of the worker having established a business presence? The significance of any such evidence depends on the degree of effort and expense entailed in taking such a step toward establishing business presence.
2. Risk of loss.
A worker who has a risk of loss in his/her business activities may be an independent contractor. If not, the worker is generally an employee. Determining whether a worker has such a risk of loss requires an analysis of the three factors listed below. It is important to note that not all factors need be present in order to establish risk of loss.
Indeed, if there is significant evidence of one of the three factors listed, that will establish that the worker has a risk of loss.
(a)Does the worker have a significant investment in the tools and equipment necessary for the worker's activities on the project? If so, there is strong evidence of the worker having a risk of loss. While the determination of whether an investment is "significant" is inherently subjective, special weight should be given to equipment which is necessary to the worker's job and not otherwise usable (i.e. specialized computer software, professional camera equipment and trucks necessary for the transportation of other equipment are more significant than home computer hardware, cellular telephones, and automobiles)(12)
(b)Does the worker incur significant business expenses in the performance of the worker's job? If so, there is strong evidence of the worker having a risk of loss. While the determination of whether business expenses are significant is inherently subjective, both the amount and type of expenses are relevant. For example, expenses for tools, training, liability insurance and wages of employees will tend to be more persuasive than meals, entertainment, automobile expenses, home office expenses, and fringe benefits for the worker. Expenses that are reimbursed by the production company may be considered if the worker advances funds and(11) bears the risk that expenses will not be reimbursed. However, if the only business expenses incurred are ones the production company has agreed to reimburse, these expenses will not establish risk of loss.
(c)What is the method of payment? If the worker is paid a fixed fee for the worker's services out of which unreimbursed business expenses are paid, there is strong evidence of the worker having a risk of loss. If the worker is paid on a "day rate" basis, but is required to provide significant additional services, which are not included in the day rate (for example, preparation time away from the shoot location) this is strong evidence of the worker having a risk of loss. On the other hand, "day rate" payments which approximate hourly wages for all services rendered are indicative of employee status.
3. Control over worker activities not involved with the "shoot."
If the company has the right to exercise control over the worker when the worker is not involved in a "shoot," it is generally an indication that the worker is an employee. It should be noted in this regard, however, that "directorial" control is generally necessary to create a unified effort by many individuals working to produce something that requires sequential steps. For example, the work of the casting director must be completed before the "shoot." Direction and control with respect to the timely completion of sequential tasks should be disregarded, as should control that is de minimis in comparison to the worker's overall responsibilities. In order for the worker to be an independent contractor, the relationship between the worker and the company should not be indicative of an employment relationship in any of the following respects:
(a)Time and sequence of performing work. If the company controls when the worker prepares for the shoot and the order in which work is completed it is indicative that the worker is an employee. However, if the worker may determine when and in what sequence the worker's job may be accomplished it is consistent with the worker being an independent contractor.
(b)Location of work. If the worker is required to report to a specific location to perform the worker's job, even though the job could be performed at any location, it is indicative that the worker is an employee. If the worker is free to choose the location of his work, it is consistent with the worker being an independent contractor.
(c)Maintenance of records. When the company requires the worker to maintain specific records, it is indicative that the worker is an employee. This does not include records the worker may need to transact business with the production company, such as bid forms and invoices. If the company does not require the worker to maintain any specific records, it is consistent with the worker being an independent contractor.
4. Instructions at the job site.
In the cooperative effort of shooting a commercial or video, it is necessary that some individuals perform their tasks in coordination with others and at the direction of one or more individuals in specific sequence. Therefore, as set forth in more detail in Section V below, the extent of instructions at the shoot location is frequently not an important factor in classifying workers as employees or independent contractors. Where this factor is important, however, the examining agent should determine whether there is evidence that the instructions given to the worker were limited to instructions as to the result to be achieved (consistent with independent contractor status), rather than instructions as to the method of accomplishing the result (consistent with employee status). For example, a carpenter who has been asked to build cabinets for a kitchen scene, and does so from a set of plans with which the carpenter is provided, has only been provided with instructions as to the result. If, however, the carpenter is instructed at the job site as to the order of work, techniques, and materials not specified in the plans, then the instructions go to the method of accomplishing the result.
C. Factors Not Generally Applicable.
The following factors have been examined and have been deemed to be not generally applicable in the determination of worker status in the Industry because they can be equally applicable to employees or independent contractors. These factors will not be used unless the analysis is so indeterminative that a conclusion cannot be drawn from the tests above.
1. Working for more than one employer.
Workers in this Industry typically work for more than one company. They may, on a given day, be involved in more than one project. For instance, a Director of Photography may spend time at one location planning a future shoot, but spend the rest of the day in an actual shoot for someone else. Since both an employee and independent contractor may work for more than one company, this factor by itself is not very helpful in this Industry. However, whether a worker works for more than one company may be relevant in determining whether the Critical Factor of continuing relationship is met.
2. Working full time.
While a worker may be working full time for a production company on any given day, the worker may at the same time be obligating herself to another company(ies) for work tomorrow or some other future time. Therefore, working full time does not necessarily indicate worker status in this Industry.
3. Reports.
Except perhaps at the executive level, there are few reports rendered in the Industry other than reports of time and expenditures for reimbursement. Performance evaluation is rendered in repeat contracts and verbal recommendations, not in written form. Therefore, this factor is not helpful in determining worker status.
4. Right to discharge.
Generally, an employee can be discharged at will, while an independent contractor cannot be discharged without liability. In the Industry, however, a production company may have the legal right to discharge, but it may be a right that cannot be exercised without the penalty of having to reschedule many other workers at an exorbitant cost. For example, if everyone were present and ready for a shoot, but the Director did not care for the approach of the Lighting Director, the Lighting Director could not be discharged without rescheduling the shoot and making payments to worker who showed up for the shoot. The existence of contractual liability to the Lighting Director is therefore relatively insignificant in determining whether the worker would be discharged. In other works, the nature of the business tends to nullify the right to discharge a worker, and it therefore is not helpful in the determination of worker status.
5. Right to terminate.
Generally an employee is legally entitled to terminate services at any time, while an independent contractor cannot do so without the risk of incurring liability for damages. In the Industry, however, this distinction tends to be unimportant because even if failure to complete a job does not put them at risk for money damages, such a disruption to a Producer's or Director's schedule could damage the worker's reputation and marketability in an industry where workers rely on work-of-mouth recommendations to obtain future work. Therefore, no worker can effectively terminate services without incurring economic harm and this factor is not helpful in determining worker status.
6. Integration.
There has been a tendency for regard the necessary integration in this type of enterprise as proof of control over all workers.13 However, the integration of many different skills in the Industry to produce a commercial or video does not provide a basis from which to infer control any more than the integration of many different skills in the ship building or construction industries. Those providing the necessary services at the necessary time may be either employees or independent contractors and therefore this facto is not helpful in determining worker status.(12)
7. Personal services.
Frequently, producers and directors are looking for a specific style, expertise, or artistry that is part of the result contracted for with a specific worker. Therefore, a requirement that services be provided personally may be consistent with either independent contractor or employee status and should usually be disregarded.
SECTION V - APPLICATION OF THESE STANDARDS TO SPECIFIC JOB FUNCTIONS WITHIN THE INDUSTRY
To determine whether a worker in this Industry is an employee or independent contractor, the following analysis needs to be done.
First, determine whether the worker fits into Category One, Two or Three. This should be done by comparing the worker's job functions (not the job title) to the descriptions contained in the "Glossary of Job Descriptions" found in Appendix B. Job titles do not always match job function particularly when comparing the two segments of the Industry. Care must therefore be taken to make sure the job function is being analyzed, not the job title. In addition, one some projects, a worker may perform tasks that are contained in the description of more than one job. In this case, the first step is to determine the worker's primary function. If the worker merely performs a de minimis amount of miscellaneous tasks unrelated to his primary job function, the worker should be treated as in the primary job function. Similarly, if the worker performs both a primary function (for example, Director of Photography) and the functions of other workers who would be expected to report directly to the primary function (for example, Camera Operator and Camera Assistant), the worker should be treated as in the primary job function. If, however, the worker performs more than a de minimis amount of job functions unrelated to the primary function, then the worker's total responsibilities must be evaluated to determine whether the worker is an employee or independent contractor.
Second, determine whether any of the Critical Factors in Section IV A are present. As noted above, if any one of these Critical Factors is present, the worker will be an employee. If none of the Critical Factors is present, the worker may be either an employee or an independent contractor. The analysis then proceeds to the next step.
Third, determine whether the worker meets the Significant Factors Analysis in Section IV B, above, for the category in which the worker's job function falls. If the worker meets all Significant Factors relevant to his or her Job Category, then the worker is an independent contractor. If, however, the worker fails one of the Significant Factors relevant to his or her Job Category, then the worker is an employee.
A. Category One
If the worker falls within Category One, then the worker must satisfy the following Significant Factors: Business Presence and Risk of Loss
In Category One, the worker has substantial independent responsibilities in addition to appearing at the "shoot". Thus, it is inherent in the worker's job function that there will be minimal control over the worker's activities not involved with the shoot. In addition, any instructions to which the worker is subject at the "shoot" will be minimal in comparison to the activities in which these workers are not subject to direction and control of the means and details of their work. Thus, if the worker establishes business presence and risk of loss, the worker has met the requirements to be an independent contractor. If not, the worker is an employee.
B. Category Two
If the worker falls within Category Two, then the worker must satisfy the following Significant Factors: Business Presence and Risk of Loss and Control over Activities Not Involved with the "Shoot".
In Category Two, the worker may still perform work away from the location but this is a smaller percentage of the worker's total responsibilities. Thus, the control to which the worker is subject to at the "shoot" is potentially greater in comparison to the activities in which the worker acts independently as to means and details. In this case, the worker will not be an independent contractor unless the worker in fact has the autonomy of an independent contractor with respect to the worker's activities away from the "shoot". Of course, the worker must also establish business presence and risk of loss. If the worker cannot establish all three of these Significant Factors, the worker is an employee.
C. Category Three
If the worker falls within Category Three, then the worker must satisfy the following Significant Factors: Business Presence and Risk of Loss and Control over Activities Not Involved with the "Shoot" and Instructions at the Job Site
Since workers in this category do most, if not all, of the work at the "shoot" location, a worker must meet all four of the Significant Factors to be considered an independent contractor. If the worker cannot meet all four of the Significant Factors, the worker is an employee.
D. Example
An example of the kind of analysis that should be done under these guidelines is as follows:
Joe is the sole proprietor of Joe's Grip Service. Joe owns some tracks, dollies and other equipment used in providing grip services. He also owns a truck which is used to haul the equipment. Joe works out of his house, but has a separate phone line for his business. A production company, having seen Joe's advertisement in a trade publication, hires Joe's Grip Service to work on a two day project. In addition to Joe's working as a Key Grip, three other grips will be working for Joe. Both Joe and the other grips will be paid at hourly rates. Joe will not receive training from the company, and the company will not make guild benefit plan contributions on Joe's behalf.
Before the shoot, Joe meets with the Director of Photography at the production company's facility to determine what equipment is to be used and how it is to be used. Other than these meetings, Joe independently determines the time, place and sequence of his preparatory activities, such as renting additional equipment and hiring the other grips. At the shoot location, Joe closely follows the instructions of the Director and the Director of Photography. At the conclusion of the job, Joe submits an invoice on preprinted stationery bearing a logo for Joe's Grip Service and showing Joe's federal tax Employer Identification Number. He is not required to submit any other reports to the company.
Joe is an independent contractor for the following reasons:
(a)Joe is in Category Two because his job functions are those of a Key Grip. Therefore, the fact that he received detailed instructions at the shoot location is not taken into account in determining his status.
(b)None of the Critical Factors are present. There is no continuing relationship between Joe and the production company and the company does not provide training or make guild benefit plan contributions.
(c)All of the necessary Significant Factors have been established:
(1)Even though he works out of his house, Joe has established a business presence by advertising, having preprinted invoices, using a separate business phone line at his home office, and obtaining an Employer Identification Number.
(2)Even though he is paid on an hourly basis, Joe has a risk of loss because he has significant equipment and significant business expenses, such as the payment of employees.(14)
(3)Even though he is required to attend meetings with the Director of Photography at the production company's facility, Joe controls the time, place and sequence of the overwhelming portion of his activities not involved with the shoot and he is not required to submit any reports other than his invoices.(13)
As set forth above, the classification of a worker is determined by application of the Critical and Significant Factors pertinent to the Industry. Therefore, documentation which purports to determine a worker's status is not of itself determinative. An examiner should, however, review any available documentation, including any written agreement between the worker and the production company because it may provide evidence concerning the applicable Critical and Significant Factors. For instance, it may establish whether the method of compensation establishes whether the worker has a risk of loss. On the other hand, documentation may lead the Service to conclude that an employer-employee relationship exists, despite the inclusion of language that claims the worker is an independent contractor, because the requisite level of control is clearly delineated. It should be noted, however, that a written agreement is not a requirement for a worker to be classified as an independent contractor.
In addition, while issuance of a Form 1099 or Form W-2 is evidence of how the worker and the company view their relationship, the issuance of either form is not determinative because the issue is the substance of the relationship that exists. (Of course if neither a Form 1099 or a Form W-2 has been issued, the examiner should consider the imposition of appropriate penalties).
A. Applicability to Other Types of Entertainment Companies
Although the issues raised in connection with the Industry may be similar to issues raised with regard to other types of entertainment companies (such as companies that produce feature films, network television programs, and music videos), the conclusions stated herein should not be deemed applicable to such other companies.
B. Use of a Loan-Out Corporation
It is not uncommon in the Industry for certain workers (particularly those that are the most highly compensated) to render their services through a loan-out corporation, i.e., a corporation owned by the worker which "loans out" the worker's services to the production company. In the 1991 case of Sargent v. Commissioner, the Eighth Circuit Court of Appeals ruled that a hockey player was an employee of his loan-out corporation, rather than the hockey team which retained his services through the loan-out corporation. The Service has 'non-acquiesced" in this decision. An analysis of the Sargent case and the issues pertaining to loan-out corporations in the Industry is beyond the scope of these guidelines. Of course, if a worker qualifies as an independent contractor with respect to the production company under these guidelines, the production company would not be required to treat the worker as an employee even if a loan-out corporation is involved. Nonetheless, the worker may be an employee of the loan-out corporation.
C. Section 530 Relief.
Section 530 of the Revenue Act of 1978 provides relief under certain circumstances to businesses which misclassify employees as independent contractors and fail to properly withhold employment taxes. Section 530 provides that a business will not be liable for back taxes or penalties for failure to withhold and pay employment taxes with respect to the worker at issue, or obligated to make such withholding or payments in the future, if the business:
(1)did not treat the worker as an employee at any time;
(2)filed all tax returns (e.g., IRS Forms 1099) on a basis consistent with its position that the worker was not an employee, for all tax periods after December 31, 1978;
(3)did not treat any person holding a substantially similar position to that of the worker as an employee after December 31, 1977; and
(4)had a reasonable basis for treating the worker at issue as an independent contractor.
A taxpayer has a reasonable basis for treating a worker as an independent contractor where the taxpayer relies on (a) published judicial or administrative precedent; (b) a previous IRS audit (even one which did not pertain to employment tax) in which the independent contractor treatment resulted in no assessment; (c) long- standing practice of a significant segment of the taxpayer's industry in treating workers of the type in question as independent contractors; or (d) any other reasonable basis.
Since the applicability of Section 530 depends on factual issues which were not considered in the preparation of these guidelines, the extent to which Section 530 may provide relief is not discussed herein.
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