by: Tom Andrews, CPA
As we approach the midway point of tax year 2016 it is important for crewmembers to have an understanding as to how the vessel views the services you provide. Many times the crewmember and the owner will define their own relationship differently. Sometimes crewmembers and owners will come to an agreement as to how they would like their relationship to be defined however the IRS may define that relationship differently. This confusion may have adverse consequences when the crewmember is planning for their yearend taxes.
One of the more frequently asked questions I receive this time of year is “What can I do before year end to save money on taxes?” My answer will vary depending on the client however in most cases my follow up question is “How will your employer be reporting your income?” “How does your employer define your relationship”?
Unfortunately many yacht crewmembers are not aware how their relationship is defined in the eyes of the vessel/owner, they simply view themselves as a “crewmember” and that is it. While technically you are a crewmember how your vessel classifies employment status is a whole different matter. Are you being W-2’d with taxes withheld from your salary? Will the vessel be treating you as an independent contractor and issue you a 1099? Are you being paid through your own S Corporation or LLC? Is your employer simply direct depositing funds to your personal bank account without issuing any 1099’s or W-2’s? Are you working for a foreign flagged vessel or are you working for a US flagged vessel?
One common mistake crewmembers make is thinking that the vessel will not be issuing a W-2 or 1099 at the end of the year. Since your worldwide income is taxable the amount of tax you pay may vary greatly depending on whether or not you receive a 1099 or W-2. Every year I have a number of clients that end up owning significantly more tax than originally planned because the yacht payroll manager issued them a 1099 when in fact they should have been issued a W-2. This problem has become more common in recent years as foreign flagged vessels and yacht management companies realize they cannot simply deposit money into a crewmember account and ignore US payroll tax law.
If you want to avoid a year end surprise I would recommend that you communicate with your yacht payroll manager whenever you change jobs or vessels, also communicate with the payroll manager again near the end of the year to be absolutely certain how your income will be reported to the IRS. Again if you are working on a yacht and you are not having tax withheld from your pay check this should automatically prompt a call to your home office for clarification, once the year is over you are in a reactive situation instead of proactive.