Loan-Out Companies, Explained
How the money flows, what the IRS watches, what the election changes, and how to tell whether one is worth running for your income.
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What a Loan-Out Company Is
A way of using a company, not a special entity type
The IRS entertainment audit guide puts it simply: entertainers form these corporations to loan out the services of their shareholder, usually a 100% owner.IRS Pub. 5774 There is no "loan-out" box on a form. It is an ordinary corporation or LLC taxed as one, doing one specific job.
Who uses them. Actors, directors, writers and musicians, because production work often pays commissions and other costs a W-2 employee cannot deduct federally. Athletes, mainly for endorsement and appearance income. Creators, who usually just call it an S corp but use the same structure for brand contracts.
If you are still working out where you fit, start with our entertainment accountant page, athlete tax planning, or influencer taxes. College athletes should start with our NIL taxes guide.
How the Money Flows
Six steps from contract to your bank account
1. You own the company
Usually an S corp or an LLC that elected corporate tax treatment. You are its employee.
2. The company signs the deal
The studio or brand contracts with the company, which agrees to furnish your services. You often sign an inducement letter too.
3. The client pays the company
Gross fee, with no wage withholding at that level. Some states withhold on payments to nonresident entities.
4. The company pays costs
Agent, manager, attorney, insurance, staff and other business costs.
5. The company runs payroll
You receive a W-2 from your own company. The company withholds and pays employer taxes.
6. What is left flows through or stays
An S corp passes profit to your return. A C corp pays 21% on anything it keeps.
S Corp or C Corp
For most people this is not a close call
| S corporation | C corporation | |
|---|---|---|
| Tax on profit | None at the entity federally. Flows to your 1040 | 21% at the entity, then dividend tax when paid out |
| Personal holding company tax | Does not apply to S status | A real risk if profit stays in the company |
| Cleaning out profit | Happens automatically through the K-1 | Requires salary or dividends each year |
| Residual and royalty income | Flows through | Can make the personal holding company problem worse |
| Who it tends to suit | Most loan-outs | Narrow cases with long-term retained profit |
To elect S status for a given year, file Form 2553 no more than 2 months and 15 days after the start of that tax year, or any time during the prior year. Late election relief exists within 3 years and 75 days if you meet the conditions. IRS An S corp owner still needs a salary that holds up. See our guide to reasonable S corp salary.
IRS Risks
Three rules written for exactly this structure
Personal holding company tax. Amounts from a contract that names you as the performer, or lets someone else designate you, count as personal holding company income if you own 25% or more of the company. IRC 543(a)(7) A company is a personal holding company when 60% or more of its adjusted ordinary gross income is that kind of income and five or fewer people own more than half. IRC 542 A typical C corp loan-out meets both. The tax is 20% of undistributed income, on top of regular corporate tax. IRC 541 The usual answer is to pay out profit as wages, as the IRS guide also observes, or to hold S status. IRS Pub. 5774
Section 269A. If a personal service corporation performs substantially all of its services for one other entity and a principal purpose is avoiding federal income tax, the IRS may reallocate income and deductions between the company and you. A more than 10% owner who works there counts as an employee-owner.IRC 269A So a company built around one long contract is more exposed than one with many clients and a real business reason.
Who is really the employer. The company must operate as one. The IRS guide lists common-law employee factors and compliance with withholding and reporting rules among the things it examines. In Sargent v. Commissioner, the Eighth Circuit held two hockey players were employees of their own companies, but the IRS announced it would not acquiesce and says that outside that circuit it follows the Tax Court. Opinion IRS Pub. 5774 Performers with multiple employers have a more natural fact pattern than a player on a single team contract.
Qualified personal service corporation status. Performing arts is a listed field and athletics is not. IRC 448(d)(2) Current law taxes both at a flat 21%, so this mainly affects accounting method rules now, not the rate. IRC 11(b)
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The 21% Corporate Rate vs Pass-Through Math
Why 21% looks better than it is
A 21% corporate rate next to a 37% top individual rate looks like an easy win. IRC 11(b) Rev. Proc. 2025-32 It ignores the tax on the way out. Say a C corp keeps $100,000 of profit:
- Corporate tax at 21%: $21,000, leaving $79,000.
- A later dividend taxed at 20% plus the 3.8% net investment income tax: $18,802. IRS IRS
- Combined: $39,802, or about 39.8%.
Through an S corp, the same $100,000 is taxed once, at no more than 37%. A C corp only wins with long deferral, and for a personal service company the personal holding company tax stands in the way of leaving profit inside. S status also keeps you out of it, since S corporations generally do not pay chapter 1 entity taxes. IRC 1363
Section 199A: Why the 20% Deduction Usually Fails
Performing arts and athletics are both specified services
The 199A regulations name both fields directly. Performing arts includes actors, singers and musicians. Athletics includes athletes and coaches. Endorsing products, licensing your likeness and being paid to appear at events or in media are also listed under the reputation and skill rule. Treas. Reg. 1.199A-5
For 2026 a specified service owner keeps the full deduction up to $201,750 of taxable income ($403,500 joint), and it is gone above $276,750 ($553,500 joint). Rev. Proc. 2025-32 A working performer below those levels can benefit, and an S corp salary shrinks the income that qualifies. At higher income, do not model any deduction. More on this in our guide to specified service businesses.
California and New York
Where most of these companies live, and where the costs are
California. S corporations pay 1.5% of net income and C corporations pay 8.84%. FTB The $800 minimum franchise tax applies even at a loss, with a first-year waiver for newly formed or qualified S corporations. FTB So $200,000 of California S corp profit costs $3,000 a year before you pay your own tax on it. Non-California companies paid for services performed in California can also face 7% withholding once payments exceed $1,500 in a year. FTB
New York. A federal S election does not carry over automatically. You need Form CT-6, and a federal S corporation that does not elect pays Article 9-A franchise tax like a C corporation.NY Tax New York City has no S election and does not recognize the state one, so S corporations doing business there are subject to the General Corporation Tax.NYC Finance That cost alone can change the answer for a city-based performer, so model it before you form the company.
A Worked Dollar Example
Hypothetical actor, single filer, 2026 federal only
Hypothetical actor with $600,000 of fees and $100,000 of agent, manager and other business costs. On the left, paid directly on W-2. On the right, through an S corp loan-out paying a $250,000 salary. Both take the standard deduction. No 199A deduction, because the income is a specified service above the 2026 limit.
| Direct W-2 | S corp loan-out | |
|---|---|---|
| Fees from the production | $600,000 | $600,000 |
| Commissions and costs | $100,000, no federal deduction | $100,000, deducted by the company |
| W-2 wages | $600,000 | $250,000 |
| S corp profit on your K-1 | None | $234,936 |
| Federal income tax | $173,134 | $132,862 |
| Your Social Security and Medicare | $23,739 | $15,514 |
| Employer payroll tax you bear | Paid by the production | $15,064 |
| Total federal tax | $196,873 | $163,440 |
The gap is about $33,433 a year before state tax and the cost of running the company. Almost all of it comes from deducting the $100,000 of costs. The payroll tax side actually runs the other way in this example, since the company bears employer tax the production would otherwise pay, unless the contract adds it to the fee.
Cut the costs to $20,000 and the benefit falls to about $5,400, before the cost of running the company. And the salary in this example is an assumption, not a recommendation. It has to reflect what your services are worth, and a figure that is too low is exactly what gets challenged.
Already earning W-2 wages elsewhere?
The excess Social Security credit covers tax withheld from your wages, IRS Topic 608 not the employer share your company pays. If you have other wages above the 2026 wage base, your own company's employer tax is a cost that does not come back.When It Is Not Worth It
Plenty of working performers should skip it
- Small deductible costs. The deduction is the main benefit. Without meaningful commissions and fees, there is little to capture.
- Income too low to absorb the costs. Payroll service, an entity return, state fees and bookkeeping are annual costs that come first.
- Contracts that will not pay a company. Check with your union and payroll companies. Some work will still come to you personally on a W-2.
- Irregular income. Real payroll in a lean year is a cash flow issue, not a formality.
- One client, no other business purpose. That is the fact pattern section 269A targets.
- New York City base. Run the General Corporation Tax first.
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Frequently Asked Questions
What is a loan out company?
A loan out company, also called a loan out corporation, is a company you own that employs you and contracts your services to others. A studio or brand pays the company, the company deducts its costs and pays you a W-2 salary, and what is left is taxed under the election you chose.
Is a loan out corporation an S corp or a C corp?
Either can work. A loan-out is a way of using a company, not a tax category. Most choose S corporation status because profit passes through once and the personal holding company tax does not apply, though state rules such as New York City can change the math.
What is the main tax benefit of a loan-out company?
Business deductions. A W-2 performer paying agent and manager fees gets no federal deduction for them, while a company deducts them as business costs. Other benefits include retirement plan options and liability separation. The 21% corporate rate is rarely the reason, because of the second layer of tax.
When is a loan-out company not worth it?
Usually when fees and deductible costs are small, income is low or irregular, or you mostly work on union jobs that will not pay a loan-out. You take on payroll, an entity return, state fees and possibly employer taxes the client no longer pays. Run the numbers on your own contracts first.
Do athletes and creators use loan-out companies?
Some do, mainly for endorsements and brand work. Athletes face extra risk putting team pay through a company, since the IRS follows a Tax Court line outside the Eighth Circuit. Creators often just call it an S corp, and the same rules on salary and specified service income apply.
How do California and New York treat loan-out companies?
California charges S corporations 1.5% of net income with an $800 minimum and C corporations 8.84%. New York State needs its own S election, and New York City has no S election at all, so a city-based S corporation pays the General Corporation Tax. Those costs can change whether the company pays off.
Set the structure up correctly the first time
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Educational information, not individualized tax advice. The example is hypothetical and simplified, and it is not a promise of savings. Taxstra is a CPA firm and does not provide legal advice. Talk to a lawyer about the contract and entity documents.