Tax and Financial Planning for Entertainers: Complicated and Multifaceted
Entertainers face unique challenges. A period of many roles and fame may be followed by a long period of scarce work. The person may have income from product endorsements, royalties, and the like. The implications of the details in these agreements can cause unforeseen tax consequences if the agreements are not carefully written.
The Tax Story
Taxes are another concern. The tax implications of entertainers' earnings are huge. They may be responsible for paying federal taxes as well as state taxes in multiple state and countries. They may be classified as independent contractors or as employees. They may be taxed as nonresident aliens. Each of these scenarios has different tax implications.
Independent contractor or employee?
Whether the entertainer is classified as an independent contractor or an employee impacts what tax deductions and credits are available. This is especially true because the Tax Cuts and Jobs Act of 2017 eliminated many deductions, including the deduction for employee business expenses.
In response, many entertainers opted to form so-called loan-out corporations and become their own employees. Then, when they "loaned out" to whoever uses their services, they can deduct 100% of their associated business expenses on their corporate tax return. They also pay the corporate tax rate, which is lower than the individual rate. As an added benefit, they get the liability protection a corporation gives them. On the downside, they are responsible for the corporation's administrative, payroll, retirement planning, insurance and other expenses, which can make the cost of forming and maintaining the corporation too expensive.
Even if a loan-out corporation is not tenable, self-employed entertainers (those who receive 1099s) may be able to take tax deductions that are not available to those who receive W-2s. Typically, actors working on agreements from the Screen Actors Guild and similar unions are considered employees, with the tax advantages employees are entitled to, and they receive Form W-2.
Income Diversification
Successful entertainers often expand outside the entertainment industry so they can diversify their income stream. The tax implications of these investments need to be carefully evaluated so the investment is structured to provide the most benefit.
Planning for the Future
For entertainers, planning for the future can be problematic because their income is so unpredictable. Even entertainers who anticipate a pension from the Screen Actors Guild may be surprised by the amount they will get. Because entertainers earn pension credits based on their earnings from work, a high-paid celebrity will get more than someone who is less famous.
Risk tolerance is part of the assessment of how and where to invest for the future. Someone who is very conservative might choose a mutual fund, while a risk-taker may opt for investing in a startup venture. It is risk versus potential return. Life insurance policies and annuities are other ways to invest.
Different life and career stages guide some of these decisions. But the most important factor at every stage is having the advice of a professional, like LMJ CPAs, who is familiar with the ins and outs of the entertainment industry.