As a practitioner whose client base is 75% in the marine industry I’ve started noticing a phenomenon that may have far reaching consequences for captains and it is becoming more common! The scenario I am referring to can be summarized as follows: I’m meeting with a new client (usually they are incorporated) who happens to be a professional yacht Captain, as I am interviewing them to gain insight into their particular tax situation I ask about their business related expenses, the client then hands me their bank statements and expense log. I immediately notice that the Captain has been running crew payrolls through their own bank account.
Usually the scenarios are very similar the Captain is running a program with one or two crew, since the program is not large enough to warrant a full blown management company the Captain is pulling double duty as both the Captain and the yacht bookkeeper. In many cases the Captain is paying the crew “cash”, they are not withholding and remitting any Federal, Social Security or Medicare back to the federal government worse yet the captain may be paying foreign day crew out of his account also! You are saving the owner time and money by consolidating all of their accounting and payroll through your bank accounts, why is this a bad thing you may ask? the reason this is a bad idea is because if audited by the IRS you may be considered the “employer” and you may be held responsible for back payroll taxes, (don’t be surprised if your owner isn’t already aware of this, I’ve had my suspicions that some owners have purposely set up the scenarios to hedge their own liabilities!)
It only gets worse! Many Captains are under the impression that the crew they are paying are “independent contractors” and they are not responsible for withholding any payroll taxes, THIS IS INCORRECT!! The IRS has set fourth a list of criteria which determine whether you are to treat an individual as an “employee” or “independent contractor” (this list can be found in Publication 15-A on the IRS website at irs.gov) in almost every case I have reviewed for clients the individuals being paid should have been classified as “employees”.
It only gets worse! Since the Social Security trust fund has been under more scrutiny than ever the IRS is becoming more vigilant in auditing employers in hopes of replenishing the depleted trust fund. Unfortunately these audits usually don’t take place until years after the offense and in many cases the owner and the Captain have long parted ways.
It gets better though! The IRS is aware of the pressure being put on employers and it has responded with the announcement of a three-pronged relief package that goes some way towards alleviating employers of their well-founded fears. If you feel you may be in violation of IRS employment tax law, it’s best to contact your CPA, if there is a violation it is best to address the problem sooner rather than later.