Earning a living as an actor has always been tough. Unfortunately, due to the Tax Cuts and Jobs Act (HR 1, “TCJA”), it’s going to get even tougher. One of the provisions in the massive tax bill enacted by Congress will make it impossible for professional actors classified as employees to deduct their job-related expenses from their taxes. As a result, many actors, particularly those classified as employees instead of independent contractors, will end up paying more tax.
Prior to the enactment of the TCJA, any ordinary and necessary expenses that actors paid for out of their own pockets that were directly related to their acting activity were deductible. If you were an employee-actor, you deducted the expense as an unreimbursed employee expense. Independent contractors deducted the costs as a business expense.
Typical deductible expenses for actors include, but are not limited to, the following:
All of these expenses can really add up for professional actors, easily equaling 20% to 35% of acting income.
Unfortunately, the ability of actors classified as employees to deduct their ordinary and necessary job-related expenses (listed above) is strictly limited under the TCJA. Prior to 2018, employee-actors were permitted to deduct their unreimbursed acting expenses as an itemized personal deduction on IRS Schedule A. These business-related expenses were deductible only if, and to the extent, they exceeded 2% of the employee’s adjusted gross income (AGI). For example, an actor whose AGI was $100,000 and had $20,000 in unreimbursed expenses could deduct $18,000 (2% of $100,000 = $2,000).
The TCJA completely eliminates the deduction for unreimbursed employee expenses for 2018 through 2025. This means, for example, that an employee-actor who spends $20,000 out of his or her own pocket on business-related expenses during 2018 through 2025 will not be able to deduct the expense. As a result, professional actors with substantial unreimbursed expenses will end up paying more income tax. Actor’s Equity says that some working actors could see their taxes almost quadruple. Actors may seek pay increases to pay the extra tax, or have some of their expenses reimbursed.
This change under the TCJA regarding the deductibility of unreimbursed employee expenses will impact the many actors classified as employees. Professional actors in the United States are ordinarily members of one or more entertainment unions: Actor’s Equity, American Federation of Television and Radio Artists, and the Screen Actors Guild. When producers hire professional actors to do work covered by these unions’ collective bargaining agreements they are ordinarily required to be classified as employees for tax and other purposes. They are issued IRS Form W-2 by the producer, and the producer withholds their taxes from their pay. The producer must also pay half the Social Security and Medicare tax due on their wages.
Actors who are classified as independent contractors instead of employees are not subject to the limitations discussed above regarding unreimbursed employee expenses. Their expenses are fully deductible business expenses and there is no 2% of AGI limit. These expenses are not affected by the TCJA’s elimination of the deduction for unreimbursed employee expenses because they are business expenses, not employee expenses. The TCJA places no new limits on the deductibility of business expenses (except for certain entertainment expenses).
The tax law takes pity on actors who earn little money by providing them with a special “qualified performing artist deduction.” The deduction is unaffected by the TCJA. However, you qualify for it only if your adjusted gross income (AGI) from all sources, not just acting, is $16,000 or less (including income your spouse earns). If your AGI is this small, you qualify for the deduction if:
If you meet these requirements, you may deduct all of your performing expenses as an “above the line” deduction without itemizing and not subject to the 2% of AGI threshold. Few actors earn less than $16,000. Most who earn less than this from acting have other jobs, or a spouse who earns income.
Highly successful professional actors often form personal service corporations, referred to as “loan-out corporations” in entertainment industry parlance. Instead of hiring the actor individually, a producer contracts with the actor’s corporation and pays the corporation, not the actor. The actor is an employee of his or her corporation. In this arrangement, the corporation is entitled to deduct all of the actor’s unreimbursed expenses as a business expense. Thus, the limitations on deductions discussed above don’t apply. Due to the expense and complexities involved, however, an actor must earn enough to make this economically feasible.