Got an offer for a Hollywood movie? Congratulations. But if you are a non-U.S. resident, you may be surprised what you actually take home after U.S. taxes.
U.S. studio companies work with people around the world to produce movies. As talent, you should think about U.S. tax matters before taking any offers.
U.S. Tax Resident vs. Nonresident Alien
Unlike almost all other countries in the world, the U.S. has a worldwide taxation system. When becoming a U.S. tax resident, your worldwide income is subject to U.S. tax regardless of where your income is generated.
The rules for determining a person’s U.S. residency is tricky. Assuming you are not a U.S. citizen or a U.S. green card holder, your residency is determined by the substantial presence test. This test is based on the number of days you are presented in the U.S. Specifically, if you stayed in the U.S. for at least 183 days in a year, you should be treated as a U.S. tax resident for the year.
The Look-Back Rule
Also, if you stayed in the U.S. for more than 30 days for the testing year, you must adhere to the Look-Back Rule. According to this rule, you must “look back” to the number of days of the two preceding years to calculate if you stay in the U.S. for at least aggregate 183 days for the three years.
The formula of calculating the days of the aggregate three years is all the days you were present in the testing year, plus a third of the days you were present in the first year before the current year, and a sixth of the days you were present in the second year before the current year.
When receiving an offer, you should review the working schedule and estimate how many days you would be presented in the U.S. per year to analyze the substantial presence test.
For example, John, a film director, will be working in the U.S. five months a year for three years. In this case, John would not meet the 183 days in a single year, but he would still be treated as a U.S. tax resident based on the Look-Back Rule of the substantial presence test.
The Closer Connection Rule
If a person met the substantial presence test under the Look-Back Rule but was not presented in the U.S. for 183 days in the testing year, the person can claim the Closer Connection Rule statute. The Closer Connection Rule is treated as a nonresident alien. This is different from the Treaty Closer Connection Rule, which relies on an income tax treaty between the U.S. and the person’s country of tax residency. Whether you can claim the Closer Connection Rule is determined based on facts including:
- Location of principal home, family and personal belongs
- Location of business activities
- Address listed on driver’s license
John, who met the substantial presence test from the example above, could still be treated as a nonresident alien assuming he is qualified to the statute Closer Connection Rule.
The Treaty Position
If a person met the substantial presence test because of being present in the U.S. for more than 183 days in the testing year, we can then look at whether the person can claim a treaty position. Assuming there is an income tax treaty enforced between the U.S. and the country of your residency, you should analyze the treaty (most of the time in the article of residency) to determine if you can claim the nonresident alien position.
The U.S. tax consequences of being a U.S. tax resident are complicated, especially for a non-U.S. person who has various non-U.S. sources of income or investment holdings. Therefore, the above analysis is crucial and extremely important.
Further, you may also need to model out your global effective income tax by taking into account the tax liability from your home country and potentially the foreign tax credit from the U.S.
Direct Employee vs. Loan-out Company
Now that you have determined your U.S. tax residency, the next important issue is to decide whether you should be a direct employee of the studio or set up a loan-out company.
Most U.S. studios generally would offer to pay your services as an employee salary or have a service contract with your loan-out company, no matter you are a U.S. resident or nonresident alien (assuming you can legally work in the U.S. under a valid U.S. visa).
Loan-out companies are very commonly used in the entertainment industry, where an actor or director set up a wholly owned corporation and ostensibly “employ” himself to perform services for the company. Generally, U.S. studios would require the loan-out company to be a U.S. corporation or a U.S. LLC being treated as a U.S. corporation.
Under the employee structure, when the studio makes the monthly compensation payments, such payments would be subject to withholding tax. After the accounting year is closed, you will receive a Form W-2 from the studio which lays out total compensation and withholding tax for the year. You will then file your U.S. income tax return based on the information on the Form W-2. You may have a small amount of tax refund or payment from the tax return filed.
Working as an employee is the easier option from the administrative perspectives, as the business expenses would not affect the withholding tax and the ultimate U.S. tax liabilities.
On the other hand, the loan-out company structure could cause an additional administrative burden, but it may provide some U.S. tax benefits. To get the offer, you may have to pay a commission to your agent. From U.S. tax perspectives, the commission payment could not be deducted if you are an employee. However, the commission could be deductible under the loan-out company structure.
For example, Bruce, a film actor, who got a U.S. film offer for a compensation of $2 million. Bruce has to pay a 10-percent commission to the agent, which comes out to $200,000. Under the employee structure, Bruce would have to recognize the $2 million in compensation as the total U.S. income. The $200,000 commission should not be deductible for his U.S. tax.
However, under the loan-out company structure, the studio would pay $2 million total compensation to Bruce’s loan-out company, which will recognize the total revenue of $2 million but also recognize the $200,000 commission expenses.
Therefore, the loan-out company’s taxable income is reduced to $1,800,000. There should be other business and administration expenses, which could also be deductible by the loan-out company.
To get the cash to Bruce, the loan-out company could further structure another compensation payment to Bruce. In all, the loan-out company should recognize zero or an immaterial amount of taxable income, and Bruce should recognize a U.S. source compensation net of the commission and various administrative expenses.
Comparing Tax Liabilities
In order to determine whether being a direct employee or inserting a loan-out company, you should run a model to compare the net U.S. tax liabilities. In addition, you should take into account your home country’s tax liability. It is also important to analyze whether certain U.S. income could be excluded from taxation from your home country or the U.S. tax payment could be claimed as a foreign tax credit against your home-country tax liability.
Another important factor to consider for your net income is the state income tax in the U.S. Depending on where the movie would be filmed or other factors, your compensation may be subject to U.S. state income tax. Further analysis of state income tax liability is also recommended.
Comparing tax liabilities can be complex. Consulting a Green Hasson Janks International Tax Expert can your first step in mitigating risks.