By: Tom Andrews, CPA
As a crewmember on a foreign flagged vessel you are probably being paid in one of three ways:
- You are issued a W-2 with taxes withheld.
- You are working as a “contractor and receive a 1099 at the end of the year.
- The employer is simply depositing funds to your bank account without provided a W-2 or 1099.
The purpose of this column is not to opine on the proper payroll procedures of your employer and whether or not the employer is compliant with United States payroll tax law. Compliance is a discussion between your employer and their attorney/ accountant. By writing this column I am hoping to stress how important it is for the taxpayer to understand their relationship with the vessel. You should be asking yourself “Am I an employee?” or “Am I a contractor?” as the difference between the two will affect how much tax you ultimately owe. In most cases your crew contract will clarify the nature of your services as employee or contractor however there are instances in which the contract is vague or you do not have a contract. If it is unclear whether you are an “employee” or “contractor” you may refer to the IRS website at irs.gov for guidance on the criteria that the IRS uses to make this determination.
Another layer to crew compensation occurs when you are a crewmember of a foreign flagged vessel employed by a foreign entity. Under these circumstances as you MIGHT not be required to pay social security and Medicare taxes. The exemption from social security tax is attributed to a section of the internal revenue code that addresses American crewmembers of foreign flagged vessels. The dilemma occurs when you are trying to prove your status as you will want to be able to provide documentation supporting your claims.
Assuming that you have properly filed your tax returns there are situations in which you must prove that you were in fact a crewmember of a foreign flagged vessel, these situations include but are not limited to an IRS audit, state employment tax audit or income verification as part of a home loan. If you are ever faced with having to prove that you were a crewmember of a foreign flagged vessel it will probably occur after you have left the employment of that vessel. Trying to track down documents after you have left a vessel sometimes years after the fact can be difficult, I recommend acquiring these documents prior to leaving the vessel. These document include but are not limited to the following:
- Vessel Certificate of Registry
- Crew manifest on vessel letter head.
- Letter from the employer confirming status as a crewmember of a foreign flagged vessel.
Employment in the yachting industry is not a traditional career. Sometimes outsiders will not understand the differences between this industry and mainstream employment, this makes having supporting documentation all the more important when dealing with individuals who are tasked with understanding the nature of your employment.