by Tom Andrews, CPA
The purpose of this memo is to discuss the American crewmembers responsibility when it comes to making quarterly estimated tax payments. In most cases crewmembers will be paid in the following manner:
- Crewmember issued W-2 with taxes withheld.
- Crewmember issued 1099 no taxes withheld.
- Crewmember works on foreign flagged vessel with no W-2 or 1099 issued, funds are deposited to crewmember bank account directly from the foreign employer.
The Internal Revenue Service requires that taxpayers make estimated tax payments on a quarterly basis if taxes are not already being withheld from the taxpayer salary. If a taxpayer does not make tax payments throughout the year the taxpayer may be subject to penalties and interest for late payments. Many taxpayers are under the impression that if they file an extension that they have until the extension deadline to pay their tax liability, this is incorrect, an extension only grants you an extended time to file your taxes not extend time to pay the tax liability, the tax liability is due by January 15th after the year ends.
It is important that crewmembers identity which vessels are withholding tax from their salary and which vessels are not, if you find yourself on a vessel that is not withholding tax you will want to go to the website EFTPS.com and enroll so you may begin making estimated tax payments electronically. Once you enroll on this website it will take 7 to 10 business days to receive your PIN number, once this PIN number is received you may begin making estimated payments with the tax direct debited from your bank account. You may also make tax payments via debit/credit card at pay1040.com, I recommend EFTPS because there is no convenience fee.
The amount of tax you should set aside depends on a number of factors including your level of income, the flag of the vessel, and the nationality of your employer. For the typical crewmember that is earning under $100,000 per year and working on a foreign flagged vessel with no taxes withheld I normally recommend putting aside between 20%-23% gross income (assuming no 1099 is issued). For crew members working on a US flagged vessel or receiving a 1099 I recommend putting aside between 25% and 32% of gross income, this increase is due to the additional social security and Medicare tax that will be owed. These are calculations are only estimates your actual tax liability may be more or less depending on your actual income. If you are working on different vessels throughout the year you will need to do separate calculations for each vessel.
In addition to making a provision for federal income taxes you will need to be aware if you are a resident of a State that assesses income tax. If so you will need to make estimated tax payments to your state of residency, in our experience most crewmembers earning under $100,000 per year will owe between 4% and 7% in state income tax. Most states allow you to make estimated tax payments directly through their websites, if for example you are a resident of Maine you will want to visit the Maine Department of Revenue website to confirm how you may make an estimated tax payment. It should be noted that if you are receiving a W-2 with only federal income tax withheld you are still required to make estimated tax payments to your state of residency. State taxes must also be paid in before January 15th, even if your state tax return is on extension you will want to make sure you make estimated payments in order to avoid any penalties and interest.
The purpose of this memo is to address the general considerations of estimated tax payments, every ones situation is different, if you have any specific questions, please contact me directly.