by Tom Andrews, CPA
Job duties of both of luxury yacht captains and crew often extend beyond what ordinary mainstream employees encounter. Examples of these job duties include but are not limited to being on call, frequent changes in work location, having to improvise when job resources are not immediately available, and filling in or assisting other crewmembers that may be specialist in a particular field. While not explicitly a job duty, another expectation that some consider to be “going above and beyond” includes going out of pocket for yacht related expenses. Reimbursed expenses would include those expenses that the crewmember pays for out of their own pocket and is later reimbursed by the owner. Often these expenses are incidental and may include mileage reimbursement for the personal use of a vehicle or picking up a miscellaneous part or supply on behalf of the vessel. Other times captains may incur thousands of dollars in out of pocket expenses for large ticket items such as fuel, dockage or day laborers.
I normally recommend that crew never go out of pocket for vessel related expenses and when possible I encourage management to set up a “petty cash” account or business operating account that the crewmembers may draw on. When these options are not available it is important for crew to understand the tax consequences of depositing reimbursements to their personal account.
In order for crewmembers to avoid having reimbursements recharacterized as income there should be a clear understanding between the owner and the employee that these reimbursements comply with IRS regulations under an “accountable plan”. Under an accountable plan, allowances or reimbursements paid to employees for job-related expenses are excluded from wages and are not subject to withholding. An allowance or reimbursement policy is considered an “accountable plan” if:
- There is a business connection to the expenditure.
- There is adequate accounting by the employee within a reasonable period of time.
- Excess reimbursements or advances are returned to the employer within a reasonable period of time.
Proper documentation and receipts are essential to avoid the recharacterization of these reimbursements as income. Make sure you keep copies of all receipts and the expense reimbursement form that you provide to your employers. Also depending on the frequency and amount of reimbursements I encourage crewmembers to use a separate credit card or bank account for out of pockets expenses and those reimbursements. The first thing the IRS will do during an audit is request copies of your bank statements and add up all of your deposits, comingling owner expenses and your personal affairs can sometimes complicate matters.
When working with your accountant be sure to notify them when you are receiving employer reimbursements. Unlike land based employees that receive W-2’s , crewmembers of foreign flagged vessels do not always receive a W-2 and under those circumstances the crewmember may simply add up all of their deposits forgetting to exclude qualified reimbursements, doing so may result in overstatement of income.
More information regarding employment reimbursements can be found under the IRS “Fringe Benefit Guide” on the Internal Revenue Service website at irs.gov.