by Tom Andrews, CPA
As the payroll processes in the yachting industry becomes more formalized the number of crew being treated as statutory employees has increased dramatically over the past ten years. As a result crewmembers are no having taxes withheld from their wages and being issues W-2’s at the end of year. While there are still a large number of foreign flagged vessels that still disregarding US payroll tax laws the number of vessels coming into compliance is slowly increasing.
Working as a W-2 employee has benefits as it helps crew members avoid owing tax at the end of the year as the taxes withheld should be relatively close to the amount of taxes that will be due on the crewmembers tax return. Another benefit is that the crewmember will now have a proper W-2 and this sometimes assists lenders with the income verification process when purchasing a home.
While having taxes withheld will make tax processing easier if a tax payer does not properly complete the form W-4 then there might be issues at the end of the year. The form W-4 is required so that your employer can withhold the correct federal income tax from your pay. Some of the unique attributes included on this form include dependents, whether or not you itemize your deductions, marital status and living situation. Now that tax reform has passed the IRS is reporting that almost 30 million taxpayers will not have enough tax withheld from their salary and those taxpayers will owe the IRS money at the end of the year. This typically happens because the taxpayer is not updating their w-4 or they are claiming too many dependents and not having their accountant review the form.
Another reason that W-2’d taxpayers might owe tax at the end of the year is that when married couples each work they are sometimes claiming each other on their respective W-4’s. For example when a married individual is completing his or her payroll forms they will be asked if they are claiming their spouse as an allowance, almost instinctively spouse might say “yes”. When the other spouse is completing his or her W-4 they will be asked the same question and if they also answer yes the payroll department will under withhold tax as they do not realize each spouse is claiming each other. Too compound matters sometimes spouses will each claim their children on their W-4 as well. If a married couple with two children are each claiming four dependents the total dependents being claimed between the two is eight when in reality there are only four people in the household.
Unless you are single claiming one dependent on the form W-4 I would recommend that any yacht crew have the payroll processing company clearly walk you through the W-4 when you are completing it or ask for a copy and forward it to your accountant so that the accountant can confirm you are having enough tax withheld from your salary.