By Tom Andrews, CPA
As you begin the 2017 tax year now is the time to implement habits and strategies that will make filing easier for you at the end of the year. Many of the taxpayers I speak with take a reactive stance to tax planning that is sometimes detrimental to their long term plan, now is the time to be proactive. Working in the yachting industry will present you with a number of problems that many land based tax payers will never contend with. Some of those issues include but are not limited to the following:
- Working on a foreign flagged vessel.
- Not receiving any supporting documentation from your employer at the end of the year.
- Your classification as a contractor or an employee.
- Working on multiple vessels throughout the year.
- Not having tax withheld from your paycheck.
Now that it is early in the year we recommend you come up with a plan so that you are not caught off guard at the end of the year. If you are working on a foreign flagged vessel contact your employer’s payroll department to determine if you will be receiving a W-2 or 1099 at the end of the year. Get an understanding of how your services are being classified. Are you a contractor or an employee? Sometimes the yacht owner will tell a crewmember that they are an employee only to find out that at the end of the year that the crewmember is being treated as an independent contractor. This distinction may have material impact on amount of tax the crewmember will owe at the end of the year.
The biggest planning mistake that we run into is that the crew member does not make estimated tax payments throughout the year. If your employer is not withholding tax from your salary you may still be required to make estimated tax payments to the IRS. It does not matter that you were working on a foreign flagged vessel outside the United States, unless you qualify for the foreign earned income exclusion or foreign tax credit, chances are you will need to make these estimated tax payments.
There are also the preventative actions you can take throughout the year to help ease your tax burden. Making contributions to your IRA, maxing out your 401-K, timing your medical deductions and charitable contributions etc. Over the years the Internal Revenue Service has developed a very helpful website that can assist taxpayers with many of these questions at IRS.gov.
While there are many proactive things you can do now the single most important action I recommend to yacht crewmembers is to make sure that you are making estimated tax payments if your employer is not withholding tax at the source. In my experience not making estimated tax payments has caused the most grief to yacht crewmembers.