OLYMPIA — For years, low-budget theater groups throughout the region have treated many of their actors and stage technicians as independent contractors, rather than as regular employees.

It's a way of compensating actors with small stipends while avoiding other costs, such as unemployment-insurance and workers'-compensation taxes.

Trouble is, the state says it's not legal. And in recent years, state auditors have hit at least three theater companies with hefty bills for unpaid taxes.

The issue surfaced this week after a group of Seattle theater managers met to discuss the problem.

If theater companies are required to treat all actors and technicians as employees, managers say they could be forced to stop paying some actors, drastically cut back on productions or possibly go out of business.

"I've never seen a group of more scared theaters," said Kent Phillips, who runs two theater companies, the Tacoma Actors Guild and the Bellevue Civic Theater.

State officials say the audits were random and that they have no plans to start chasing down other theater companies that treat actors as independent contractors.

But theater managers throughout the region, worried about who will be hit next with a big bill from the state, are scrambling to figure out how to respond.

Meanwhile, others in the broader arts community are concerned they could face similar problems with the state.

At a meeting yesterday in Seattle, Washington State Arts Alliance members began looking for ways around having to treat all actors and other paid artists as full-fledged employees. One possibility is to get the Legislature to pass some sort of exemption for arts groups.

"This could be a very large problem, a Pandora's box, not just for the arts but other nonprofits," said Arts Alliance President Steve Lerian, executive director for the Kirkland Performance Center. "It's clear it's something the alliance needs to take up with state officials. The key is to nail down the definition of employee, as it pertains to the arts."

All-volunteer community theaters and the larger professional theaters that can afford to pay union actors won't be affected by future audits. At risk are the dozens of small-capacity, low-budget theaters that pay many temporary actors and stagehands modest stipends to partly compensate them for their efforts.

Paying stipends to young and developing actors has helped create one of the nation's most vibrant local theater scenes, said Gretchen Johnston, executive director of the Arts Alliance, and others.

It appears problems first arose six years ago, when the state Department of Labor and Industries cited Harlequin Productions in Olympia for improperly classifying some technicians as independent contractors. The agency ordered Harlequin to pay thousands of dollars in back workers'-compensation taxes, said Aleena Schneider, the theater's business manager.

The theater continued hiring some technicians as contractors, but started paying workers'-comp taxes on their stipends. At the time, the theater wasn't paying it's nonprofessional actors, but now pays them $100 weekly stipends.

Two years ago, the theater faced a second audit, this time by the state Department of Employment Security. The agency told Harlequin it should treat its actors and technicians as employees and ordered the theater to pay $2,500 in back unemployment taxes.

Harlequin appealed the department's finding and the case is scheduled for a hearing in Superior Court in August.

The issue didn't start reverberating through the arts community until recently, when word got out about two Seattle theater companies that are facing similar audit problems with Employment Security.

In a letter last month, the agency told Taproot Theatre Company that last year the theater had improperly classified 71 temporary actors and stage technicians as independent contractors instead of employees. The agency sent Taproot a bill earlier this month for nearly $3,000 in unpaid unemployment taxes — and the theater is still awaiting word on whether it will have to pay more in penalties.

The Civic Light Opera was also audited last year and got slapped with a $5,000 bill for unpaid taxes.

"I'm not trying to circumvent the law," said Scott Nolte, artistic director at Taproot. "I thought we were well inside the law."

Sharon Hitt, a manager at Employment Security, said the department could not discuss the details of specific audits.

But she said theater actors and stage technicians do not fit the state's definition of independent contractors, essentially workers who have their own independent businesses and are not supervised by their employers.

Nolte and other theater managers say they don't think there is any vendetta against them. But they think there should be some leeway under the law allowing them to keep using a stipend system to pay some artists.

"This is art," Schneider said. "This isn't a job."

Seattle Times reporter Misha Berson contributed to this story. Ralph Thomas: 360-943-9882 or rthomas@seattletimes.com