Nonresident Tax Withholding

by Tom Andrews, CPA

A sensitive topic in the luxury yachting industry is the withholding of United States federal income tax from the salary of a nonresident crewmember.  There are a variety of reasons why an employer may be required to withhold tax from crewmember wages, these reasons include but are not limited to the following:

  1.  Violation of the Substantial Presence Test which was discussed in last month’s column.
  2.  Tax treaty limitation.
  3.  Statutory requirement.
  4.  Visa requirements.
  5.  Employer discretion.

There is has been a longstanding myth in the yachting industry that nonresident crewmember wages earned on foreign flagged vessels are automatically exempt from tax.   While there are circumstances in which nonresident crewmember wages are exempt from income tax it is a narrow exception in which many crewmembers still do not qualify.

If a nonresident believes their salary was improperly subject to tax withholding  they have the option to file an income tax return with the IRS at the end of the year.  If the IRS is in agreement with the claims made by the nonresident the overage of taxes withheld may be eligible for refund.  It should also be noted that most crewmembers should also be filing income tax returns in their home country and paying tax on their worldwide income.   Most tax treaties permit a crewmember to claim an income tax credit for taxes paid to the United States on their home countries tax filing so that they are not double taxed.

Once the employer has withheld and remitted income tax from the crewmember salary those taxes will remain with the IRS until the nonresident files a nonresident income tax return.  It is important that crewmembers coordinate with their Captain or owner so that the number of days being categorized in the United States is correct.  Often times the captain will report the number of days that the vessel is in the United States and not report the number of days that the actual crewmember is present in US territorial waters.  This may be problematic if the crewmember has taken vacation or leave outside the United States.

It is not the employer’s responsibility to educate the nonresident on their individual income tax responsibilities, the employer’s responsibility is to insure their compliance with payroll tax law.  Even if the employer is not complying with United States payroll tax law it is still the responsibility of the nonresident to “self comply” if they are aware their income may become subject to United States income tax. 

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