We have been receiving this question (for years now)
from our clients--all too frequently.
I received a City of LA Business Tax letter, saying I may need to pay more taxes for this. I'm an actor, and used your services for (Tax Year(s) _____).
Can you please tell me how I should proceed with this?
OUR GENERAL STATEMENT ON THE PROBLEM
We do not consider this an income tax issue and therefore believe this problem is beyond the standard scope of our business. Additionally there is little we can do for you if you are contacted. Each year we send out at least two emails to our established clients to let them know they should file for the exemption before the end of February. That is the best we can do.
Any material we provide is for information only and any conclusions we reach are an opinion only. You should not consider it to be a legally binding statement.
Even though we are trying to present the most accurate understanding we can, we consider the problem as fluid (changing) because we have discovered the information our clients have received from City employees may differ from what we are presenting below.
And just so you know, we were audited by the Department of Finance from the city of LA in December of 2008 (and yes, we passed.) Although we were told it was just part of their "normal" process of confirming business licenses, interestingly we received two separate letters from two different auditors just to make sure we were covered as part of the Department of Finance's "normal" process. Draw your own conclusions as to how they perceive our presentation below.
Regardless, here's the scoop:
If you receive cash income (which means cash, check or under a 1099-MISC--any compensation OTHER than a W-2 for your work) as a performer the first thing you should do is file for the "Creative Artist Exemption" for 2016. You are covered for income up to $300,000 as a performer, writer or other member of the Creative arts.
If your income is outside the creative field, then you may also qualify for the "Small Business Exemption" (gross income up to $100,000.)
You have until February 29th (in 2016) to register with the city for the exemption so that they have a record just in case you receive cash income during this year. You need to re-file for these exemptions EVERY year.
Even if you have no anticipation of receiving this kind of income, we urge you to register.
Otherwise the city clerks will believe they have the right to harass you for not having a license in a year or two when they receive information from the state regarding who filed their taxes using a Schedule C for any tax year.
If you need to SIGN UP FOR THE TAX PROGRAM, click on the link below:
If you have REGISTERED ALREADY AND WANT TO GO TO RENEWAL PAGE DIRECTLY, click on the link below:
You can use the link below to the City's website to learn ALL ABOUT THIS PROGRAM on the city's website if you feel you want more information.
If you live in the city of Los Angeles we urge you to sign up for the license before the deadline (usually the last day of February each year) JUST IN CASE you earn cash income from a source. It is possible you don't even understand you are being paid in a manner that may bring you up on the city's radar.
If you file prior to the deadline you will almost always qualify for one of the two exemption credits explained below.
Just do it. It is better to be safe than sorry.
And now, to what this is all about:
Under no circumstances should you directly quote the following information as a legal source because this is an opinion only.
When you earn any income by cash or check (i.e. without deductions taken as an employee) for tax purposes this income is considered as earnings received as an "independent contractor." Under IRS rules you are forced to report that income to the Federal Government on a Schedule C form which carries the headline, "Business Income or Loss." If you file a tax return for California a copy of your completed Federal forms is always sent in to the State of California when you use a Schedule C. Although this is supposedly only to validate the return you are sending to the state, the result is you are providing the state with a copy of the Schedule C you filed with the IRS.
In approximately 2003 several cities within California lobbied the state legislature for the release of certain information from state returns that would assist them in tracking down individuals who were "doing business" in their cities without paying a business tax through the purchase of a business license. This legislation was passed. In 2009 it became a law for both the cities and the state to share any information they may have regarding businesses for the purpose of collecting taxes.
The cities then make use of this information as they please. In the case of the city of Los Angeles they compare this data against their Business license records and if you aren't listed the computer generates a letter demanding you answer their form and purchase a business license. It is the city's position that because you filed a Schedule C on your Federal tax return and used a city of LA address, you are "doing business" in the city limits.
Despite how they represent themselves in the letter, by phone or in person, they DO NOT learn how much you made nor do they learn the occupation you have placed on the Schedule C. The ONLY information they are aware of is simply that you filed a Schedule C (and therefore supposedly consider yourself an independent contractor) and that you live or worked in the city of Los Angeles.
Although you might consider even this limited release of your personal finances is an intrusion into what is supposed to be confidential tax information (an issue which to our knowledge has never been legally challenged) the cities have been given no additional details.
This explains why you received the threatening letter from the city of LA. Ultimately, the city is demanding you have a business license to pursue work as an independent contractor and pay additional taxes on the income you may have generated.
All this hassle is because someone paid you in cash, whether you actually sought the work as an independent contractor or not.
An obvious argument is that an actor normally seeks work under a W-2 as an employee and if they are paid in cash it is not usually the intention of the performer but the city doesn't care. Apparently they need the money more than they believe they should foster positive relations with the citizens they are here to serve.
HOW DO I HANDLE THIS PROBLEM?
The first quandary is that although Federal tax laws demand you use a Schedule C with the heading "Business Income," the use of those forms does not necessarily indicate that you consider yourself a business nor that you actually sought out compensation as an independent contractor. This is simply the position taken by the city. That opinion may work in general, but it does not always apply in every specific situation, such as the life of an actor/performer.
The alleged purpose of the business license is to allow you to pursue business within the boundaries of the city actively SEEKING income as an independent contractor. Obviously most businesses are doing exactly that.
On the other hand, actors (in general) are not. When an actor receives income as an independent contractor it is usually the exception rather than the rule and simply a by-product of their search for work rather than their standard method of payment.
EXAMPLE: One of our clients was reimbursed $75 dollars for gas costs while doing an Equity Waiver play and reported that income on her Federal tax return. Two years later she was told by a city clerk she owed close to $300 in license, tax and penalties because she had "been doing business in the city of Los Angeles without a license."
Most actors pursue employment under union contracts which demand that they be paid as employees and therefore you receive a W-2 indicating the taxes that were withheld during the year. However, if you shoot a commercial you may be asked to agree to print advertising or personal appearances as part of the campaign. This income is almost always paid as a non-employee, and/or reported on a 1099-MISC, requiring that the income be reported on a Schedule C.
If you perform in an Equity waiver production, Equity demands that you receive compensation for your travel expenses, and other minor costs, and this is also paid in cash (remember the term "paid in cash" in this context includes being paid by cash OR check with no taxes being taken out) and this income too, small or large, must be reported on a Schedule C.
In the situations indicated above the performer didn't seek out the print work and the subsequent payment process; it was a by-product of their normal employee compensation.
The essential point is that almost all actors do not pursue work as an independent contractor but, because the state labor board is not able to properly enforce the state labor mandates, many companies compensate actors for the very same work they normally perform as employees by paying in cash. It is not the actors' fault that the employers are continually allowed to get away with breaking the law. (But interestingly you are also not allowed to work without being compensated—by those same laws.)
THEREFORE, IT IS OUR OPINION:
As actors do not normally pursue work as independent contractors they should not be required to purchase a business license to seek work in the city of Los Angeles. But the city is enforcing the law differently.
They believe actors are supposed to have purchased a business license just in case an employer decided, on their own without the input from the actor, that they will pay in cash. It doesn't matter that in many instances the actor may have very well received less income for the work (i.e. through involvement in an Equity Waiver production) than the minimum cost of the business license.
Normally one would think it wouldn't be the policy of the city to drive workers and industry out of the area just because the governmental agencies in charge of overseeing employment standards are inefficient in performing their responsibilities, but it is.
Clearly the city is taking advantage of the situation to fill the treasury and although their computer may spit out a letter stating otherwise, the policy that the city is attempting to force upon actors isn't valid for our unique situation.
In 2005 the LA City Council, with the urging of the Writers Guild (WGA) and S.A.G., came to the same conclusion. They changed the law, first raising the initial tax exemption to a $50,000 exemption starting in July of 2005 and then allowing a TOTAL exemption for all Entertainment Related individuals who grossed up to $300,000 starting January 2006. The one caveat was a requirement that you must "register" with the city by February 28th of each year to qualify for the exemption if you intend to perform self-employed work.
However, as we stated, most actors/performers do not seek or intend to perform self-employed work, it is simply a by-product of their job search. Ergo, most performers have no idea that they should register at all and why should they register if they have no intention of seeking the work. Plus, what happens if they don't register but ultimately learn after the deadline that they will be paid in cash for their work?
The city has stated that if you receive cash for your services after January of 2006 but haven't pre-registered, you have at least thirty days to register and still be in compliance with the new ordinance passed by the city council. The exact quote from the office of the General Manager of the City Finance Department stated this:
"If a creative artist is paid on a 1099 form and files a Schedule C on their Federal and State income tax returns, the City considers that person to be engaged in business. The person is given the month in which they start in business, to the end of the following month to obtain a Business Tax Registration Certificate."
Further, they indicated that what substantiates their "right" to pursue you for a license is simply their belief that you had a requirement to purchase a license in a prior year:
Effective with the 2006 renewal year, based on the 2005 receipts, a creative artist with qualifying creative activities of $300,000 or less, would be eligible for the creative artist exemption. However, in order to qualify for this exemption, the creative artist must register and report any back years, if applicable, by February 28 EVERY year.
And although they have always neglected to do their due diligence to inform the performing community (as well as the general population of the city) of this requirement, they still believe they have the right to go after the "taxes" (and penalties and interest) for past years despite the exemption from the City Council from 2006 on.
THE EXEMPTION FOR THE CURRENT YEAR IS GREAT BUT WHAT ABOUT PAST YEARS?
Obviously it is rather hypocritical for the city council to admit they made a mistake regarding individuals in the entertainment industry and permit exemptions, if filed before the end of February, for 2006 onward, but still pursue them for any year an exemption wasn't filed. We suggest you indicate this when you send in your response to their demand letter.
THE RULES PRIOR TO 2006 (as we understand them)
Apparently if you made less than $5,000 and/or worked less than 7 days in total during the year, there is no requirement to pay any additional tax and you may possibly be exempt from having to purchase the license as well. In other words, if you fall within these requirements you may not have to pay anything at all.
It is also our understanding that the city has not been given any information as to the amount of income you have claimed on your return nor the type of business you stated on your tax return. (We have no intention of suggesting you misrepresent yourself or your income to the city, we just think you should know what they do and/or don't know about your information.)
You should also determine if you performed this work OUTSIDE of the city of Los Angeles (i.e. on location, or wherever.) In that case you do not have a liability. But you should be aware that the actual city boundaries are quite extensive and even if you work in Venice, San Pedro, Sherman Oaks, Valencia and a myriad of other locations you may think are separate cities, you are REALLY working in the city of Los Angeles.
WHAT IF I AM NOT AN ACTOR/PERFORMER?
While what we have presented may be valid arguments for creative artists who are not normally seeking employment as independent contractors, little of this applies for almost any other employment such as acting teachers, research assistants, photographers, some personal assistants (which should be paid on a W-2 as well), carpenters or most other independent business pursuits including tax preparers. This work is almost always seeking compensation by cash and therefore would, and should, require a business license.
For most business pursuits OUTSIDE of the entertainment industry, we are in complete agreement with the city. If you are pursuing cash business within the physical limits of the city you should be required to purchase a license to do so. The same changes made by the city council also made the requirements and the process a great deal easier for anyone who should purchase such a license.
The only other option would be to move your legal address outside the city of Los Angeles (mailbox in Burbank or Santa Monica?) and stay out of Los Angeles in your search for income. By doing so you will no longer have your (formerly) personal tax information create this problem for you in the future.
If you are an actor/performer here are our suggestions as to how to reply to their request for information:
• You might indicate that the income was earned solely as an actor/performer or other creative artist (if this is so).
• That you didn't seek work to be paid as an independent contractor.
• You shouldn't be required to purchase a business license as you are being placed in this situation only because the employers were allowed to get away with compensating you incorrectly.
• You were forced to report that income under IRS rules that resulted in the city receiving this information erroneously and the city is using that information out of context.
If you want to become more aggressive you might indicate that a continuance of this policy will only further frustrate other actors and work against the goals of the city to keep entertainment related work within the city limits (Surely it would not be the policy of the city to drive the industry out of the area just because the governmental agencies in charge of overseeing employment standards are inefficient in performing their responsibilities.)
And further, you might indicate that it is obvious the City Finance department has not performed due diligence in getting this message across to the acting community. How is it that we can receive regular notices from the DWP, the city planners and even the Sewage department, but NOT the department of Finance until AFTER they have already determined we are in violation of a mysterious city policy.
We always urge you to send a copy of your letter of complaint to ALL of the city council members. Their email addresses are available on the city website:
One additional note: If a city employee asks to see a copy of your Schedule C to "confirm" what you are telling them, just say no. They have no legal right to see your personal tax return. Your entire tax return, including the Schedule C, has private and privileged information that they have no reason to see. If the city had any right to see the Schedule C (again, your entire tax return is confidential information) they would have already received a copy, or at least all the information it contains.
The only form required by the city to file for a business license does not require any information available on the Schedule C beyond how much you grossed, the type of business you were involved in and the address you claimed on the return.
It may be beneficial for you to volunteer to allow a city clerk to see your tax return solely to close the case, but it is entirely your decision to permit them access to any part of your tax return.
We hope this helps.