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Financial Advice

Cities Can Give You the Business

Cities Can Give You the Business
A number of cities across the country have instituted a business tax that applies to individuals who receive cash income ("cash" also includes checks and other income from which no taxes were deducted; this income is documented on a 1099-MISC form). Such income requires that you file a Schedule C, titled "Profit or Loss From Business," as part of your federal tax return. Some cities, such as Los Angeles, have convinced their state legislatures to pass laws allowing them access to certain state filing information, such as the use of a Schedule C, which these cities then compare against their records of individuals who have purchased a business license. It is their belief that if you are filing a Schedule C and thus proclaiming yourself a business, you should have a business license.

For most businesses this makes sense, because they are intentionally seeking cash income. But for actors and other performers, this is a huge problem. Almost all working actors function under union contracts as employees, with their income documented on W-2 forms, meaning that taxes were withheld. When a performer is paid in cash, almost inevitably it means the employer is attempting to circumvent existing labor laws and the established employer-employee relationship. Frequently the actor finds out only after accepting the job that he or she will be paid in cash.

When union performers receive cash, it's usually a byproduct of their employment, such as when they are paid a buyout for print work connected with a commercial or receive a small reimbursement for expenses (travel or props, for example) when they perform in an Equity waiver show on the West Coast or an Equity staged reading on the East Coast. There are situations, such as modeling work, where it's a regular practice for payment to be made in cash. But regardless of how it's earned, because the Internal Revenue Service requires that all cash income be reported, a performer can, simply by filing a tax return, become liable for these business taxes.

New York City currently doesn't apply its business license regulations in this manner. In Los Angeles, however, it has become a major problem for performers. This is because the city's Office of Finance, charged with overseeing the matter since the City Council passed its ruling in 2002, has never bothered to inform most residents of the law's existence. Regardless, the city doesn't hesitate to hide behind the bureaucratic adage that "ignorance of the law is no excuse."

So if an L.A. resident reports cash income on his or her federal tax return, a menacing letter arrives in the mail about a year later from the city's Office of Finance demanding payment for two years' worth of business taxes—the defaulted year and the current year, in the expectation that the business is still running—plus interest and penalties. In addition, it's not uncommon for the resident to receive a phone call from a collection agency hired by the office, threatening to destroy his or her credit history unless this payment is made immediately.

Isn't it great to work in the Entertainment Capital of the World?

Fortunately, the L.A. City Council backed off on the creative community and in 2004 passed an exemption for creative artists, under which no taxes are owed as long as the applicable gross income is less than $300,000. You claim the exemption when you file for a business license, which you must do annually. The only caveat is that to claim your exemption, you must apply for your license prior to Feb. 28 of each year (this year the deadline is March 1 because Feb. 28 is a Sunday). Failure to file by the deadline renders the exemption inapplicable.

But that's the catch. You must be aware of the need to file for a license in the first place. And even if they are aware, performers often don't believe they will need one, because few intend to work for cash. When they realize they do need one, it's usually too late.

Let's be clear: In Los Angeles, every performer should play it safe and file for a business license. There's just no guarantee you won't earn cash income at some point in the year. Claiming the exemption makes the license free, so it's not a financial hardship. Actors living elsewhere should check with their city to find out whether it requires that performers have a business license. If it does, get your license before you find out you're in trouble and owe money.

In Los Angeles, you can file online at Do it before March 1.

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