by Tom Andrews, CPA
As discussed in previous columns foreign flagged vessels are required to withhold federal income taxes from nonresident crewmembers while those vessels are cruising in US territorial waters unless limited exceptions apply, in some cases where the crewmembers fails the “substantial presence test” the employer may be required to withhold federal income taxes during the entire year. As the IRS continues to reach agreements with foreign governments and increase its international enforcement, more high profile cases are making the news forcing more vessels into compliance. While talking about compliance is easy it is sometimes very difficult to administer these requirements because without a taxpayer identification number the employer is sometimes confused on how to prepare W-2’s and where to send the income tax that is withheld.
The IRS does have a process for nonresidents to obtain tax payer identification numbers but this process has become more difficult as the Internal Revenue Service has made the application process more difficult by requiring nonresident crewmembers obtain a “certified copy” of their pass port from an issuing agency which is typically an embassy or consulate, this requirement was established to combat the issuance of illegal identification numbers. If a crewmember does not have an embassy or consulate nearby it can take weeks if not months to obtain this copy. In addition once the form W-7 (application for taxpayer identification number is filed) the form can take another six to eight weeks to process, by then the crewmember has already cycled through several pay periods and if the year ends before the tax payer identification number is issued the W-2 may be issued without one.
When we process the payroll for our foreign flagged vessels we have been unable to file the electronic W-2’s because the electronic version of the payroll tax form did not include a separate box to notify the Social Security Administration that nonresidents were being hired as crewmembers. As a result we had to file manual payroll tax forms this can be a problem as the IRS has been moving away from paper processing for the past ten years. The forms we filed would end up on someone’s desk and in some cases the forms would remain their unprocessed until a late filing notice was being sent out. After speaking extensively with the Social Security Administration we have now been informed that an selection for nonresident employees will be included on future internet filing forms, this should allow a more seamless filing process that will help avoid reconciliation discrepancies between the Social Security Administration and the Internal Revenue Service.
While processing nonresident crew payroll can be burdensome the consequences of not following the law dictates the extra effort. We are happy to hear that the IRS and SSA systems are catching up with the reality of the global workorce.