Reading My W-2 from a Foreign Flagged Vessel (where is the FICA Tax?)

By: Tom Andrews, CPA

Crewmembers that have been in the yachting industry for the past seven years are quite aware that the tax and financial reporting landscape has changed.   The Internal Revenue Service and the US Treasury have been relentless with enforcing the reporting responsibilities of United States companies, individuals, and employees executing any type of financial transactions overseas. Naturally this increased enforcement of tax and reporting laws has carried over into the maritime industry.    Every month it seems as though the IRS is publicizing an enforcement case which has caused vessel owners and management companies to take notice. 

For years common practice for paying a crewmember was as simple as asking for a bank account number to which crew salary could be deposited, now crewmembers are being asked to complete  W-4’s and various other forms designed to ensure the vessel is in compliance with US payroll tax law.  Before you jump to a foreign flagged vessel for refuge be advised that  some of these same payroll tax laws extend to these vessels as well.

 If you find yourself working on a vessel it is likely that you will be receiving a W-2 at the end of the year.  A W-2 summarizes your total income earned during the year and also details the taxes withheld by your employer along with any other adjustments that may be attributed to retirement contributions, health insurance, etc.  Typically an American flagged vessel will issue a W-2 that is similar to any other W-2 issued by any land based operation, there is a point of confusion regarding W-2’s issued by foreign flagged vessels.

 Some foreign flagged vessels will issue a W-2 without any Social Security and Medicare tax being withheld!  How can this be? Isn’t my employer required to withhold Social Security and Medicare?  The answer to that question is MAYBE… depending on the corporate structure of the foreign employer it is possible that the employer is not required to withhold Social Security and Medicare.  In this case you will simply receive a W-2 with only federal tax withheld and nothing calculated for Social Security and Medicare.  Some crewmembers will find this advantageous because they are paying less tax, some crewmembers find this bothersome because they are not receiving any credits for Social Security and Medicare.  In any case it is important that you are aware of these difference because many lenders and accountants are not aware of this exemption which leads to questions when you present your W-2 to acquire a loan or complete your yearend taxes.

 It is always important to clarify with your vessel if you will be receiving a W-2, 1099 or any other year end documentation, this way you may ask the appropriate questions before you take on a new job.  It also helps to review pay check stubs during the year to ensure you know exactly what taxes are being withheld.

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