By Tom Andrews, CPA
One of the more common questions I am asked of clients is “Should I incorporate”? The answer to that question depends on a number of factors but in most cases the answer is “no”. Normally the only maritime professionals that will benefit from forming a company are Captains that can meet the criteria set forth by the IRS to determine who may qualify as a contractor. The criteria the IRS uses can be accessed directly at the IRS website under Topic 762 and Publication 15-A or Publication 1779. It should also be noted that more and more vessels are coming into compliance with United States payroll tax law, this means that crewmembers are being W-2’s with taxes withheld. When given the option to be W-2’d with taxes withheld I normally recommend this choice.
While there are advantages and disadvantages to doing business as a company it is important to remind those who are using such a tax structure that they have a clear understanding of why you are doing business as a company and it is important to understand the relationship that you have with that entity. All too often I will speak with a new client doing business as an S Corporation/LLC only to realize that they really do not understand why they have the company or they do not understand the fundamental tax aspects of that entity.
As stated above I am seeing less of a need for crewmembers to incorporate however there are still some valid reasons why a yacht crew member may choose to do business through a business entity. Some crew members are working on foreign flagged vessels and are worried about the undocumented nature of their income, other crew members work for owners that mandate they form a company, and some crew members work freelance jobs making the flexibility of a company advantageous. Whatever the reason the taxpayer has in forming the company it is important that the crew member understands the basic reasoning behind these decisions, the advantages and disadvantages of doing business as a company, and more importantly the taxpayer needs to understand how that entity is taxed and what their responsibilities are in maintaining that entity.
It is also important that the taxpayer have a good working relationship with their accountant, the accountant should always be expected to answer reasonable questions and not make the taxpayer feel like they are a bother. When the tax returns are completed the taxpayer should take the time to carefully review and ask questions the questions necessary for them to comfortably sign off on those tax returns. It is important to remember that while the accountant may prepare the tax returns the taxpayer is ultimately responsible for the completeness and accuracy of those returns.