Payroll Companies' $60 Million Tax Bill: How a New Court Ruling Impacts Hollywood

The agencies will pony up big bucks April 15 as they hike fees by as much as 40 percent and workers brace for more withholdings.

A version of this story first appeared in the April 4 issue of The Hollywood Reporter magazine.

That screaming you hear coming from payroll offices all over Hollywood? You can thank Cencast Services L.P. v. United States, the tax law case that recently upended the long-standing accounting system through which workers in the film industry have been getting paid for decades.

Until this year, crewmembers, from key grips to assistant directors, technically were treated as employees of payroll companies, not production houses. So if you worked on, say, three different shoots last year, your employer would be Cencast, PES Payroll, Cast & Crew Entertainment Services or one of the other payroll companies servicing Hollywood, not the individual production companies making the movies or television shows. Now, because of a federal circuit court ruling in September, that's no longer the case. As far as the IRS is concerned, each production company you work for henceforth will be considered a different employer.

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Why does it matter? It's because of FICA and FUTA caps, the tax regulations that limit how much companies are required to pay the IRS for each employee. Last year, for instance, those three different production companies you worked for each would be required to pay $6,200 in FICA to the payroll company, but the payroll company would only be required to pay the IRS one sum of $6,200, allowing the payroll company to retain the extra $12,400 as revenue to support discounted handling fees.

he new court ruling nixes that arrangement, which could end up costing the payroll companies as much as $60 million a year, according to some estimates. "It really pisses me off," complains Linda Maslow, CEO of Maslow Media, one of the industry's smaller payroll agencies. "Our margins are so damn thin already. Why didn't they just leave us alone?" Daniel Cox, financial controller of PES Payroll, puts it in slightly more polite language: "It's a paradigm shift. It's a big, big deal."

And not just for the payroll and production companies: The new rules could turn out to be a massive pain in the assets for workers as well. "Many who work on multiple projects can expect to get more W2s in January," explains Mark Goldstein, CEO of Entertainment Partners, parent company of Cencast (the current EP acquired some of the Cencast assets but has no liability for the IRS judgment or a connection to the Cencast entity in the lawsuit). "Many work­ers will now have more taxes withheld, so their take-home pay will be less." They'll be able to get that money back by filing for refunds before April 15, but less take-home pay is never a good thing for folks who work way below the line and jump from job to job with little income security and continuity.

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Hollywood studios will feel a pinch, too, since most payroll companies already are hiking their service charges to compensate for the lost $60 million in handling fees. This year, payroll charges to the studios have risen by as much as 40 percent.

"Rate increases are tough on everybody," says Eric Belcher, CEO of Cast & Crew. "We've had a lot of conversations with our customers over the past few months and walked them through the implications."

Not every payroll company is equally affected, though, as some were already tweaking their models based on the presumption the IRS would eventually prevail over Cencast. One company, CAPS Payroll, didn't raise rates at all, according to CEO Eric Capogrosso, since it has always calculated FICA and FUTA in accordance with the way the courts now interpret the law.

There could be more implications to come. Although September's court ruling focused on Cencast -- and determined the former incarnation of the company owed $43.7 million in pocketed FUTA and $15.6 million in FICA taxes from 1991 to 1996 -- there's no guarantee the government will stop there.

"There are potential pots of gold," says one payroll exec, referring to Hollywood's other payroll companies. "I'm certain the IRS will come knocking. There are companies with significant exposure."