What is Deferred Compensation Paid Out for Films?
You’ve heard about “deferred compensation” and the old saying, “it takes money to make money”. And you know that there are times when an actor or someone else involved in the production of a film is asked to put in the time. And to accept a deferred compensation agreement. In fact, deferred compensation is common in the film industry. But what is deferred compensation paid out for films and how is it handled?
What is Deferred Compensation?
Deferred compensation is payment to an employee or contractor that takes place a number of weeks, months, or even years after the work is performed.
The idea of deferred compensation is to defer taxes on earnings that are deferred. Until their later withdrawal such as when stock options, retirement plans, or pensions are involved.
Two Types
According to U.S. tax law there are two types of deferred compensation which represent qualified and non-qualified deferred compensation plans.
Most of the time, deferred compensation falls into the non-qualified deferred compensation category in which there are no limits on how much income is deferred in a year and the tax benefits that can come as a result are potentially quite large.
Section 409A & Deferred Compensation Paid Out for Films
Section 409A represents the strict rules governing the timing of payment of deferred compensation that is paid out for films to the actors and other talent involved in a production.
Filmmakers must adhere to the rules of section 409A. And, if violated, are required to pay extreme tax liabilities that range from between 20% and 40% of the compensation that is deferred. The actual amount of tax liability depends on the individual residence of the taxpayer.
According to Section 409A
Deferred compensation paid out for films must adhere to strict timing rules. And, if the revenues are to be deferred for more than that tax year and two and a half months into the following tax year.
The specific rules and regulations must be met in order to limit the potential for serious tax liability.
Penalties for violating deferred compensation timing may include:
- 20% tax penalty on all deferred compensation payable to the filmmaker
- Premium interest penalties
- Additional 20% penalties on deferred compensation to filmmakers in California
Is Deferred Compensation Right for Me?
As you can see, deferred compensation agreements are common in the film industry. But there are also risks that can come from taking deferred compensation.
Without the support of a qualified accountant or tax attorney that understands the rules of deferment and the timing involved.
Under a deferred compensation agreement, you will not incur costs associated with tax liabilities for the part of your income that is deferred until a later date. However, deferred compensation plans are not for everyone!
In Summation
If you’re considering deferred compensation, or you’ve been offered a deferred compensation plan for a project, consider all of the potential implications and speak with an entertainment lawyer or an employment lawyer before you finalize your contract.
In some cases, payments after the fact could be a violation of other agreements, especially where film unions are involved.
So, before you decide whether to accept deferred compensation paid out for films, you need to understand your rights, and the requirements involved in timing of deferred compensation to ensure you do not face additional liabilities.
