by: Tom Andrews, CPA
One of the more common questions I am asked by clients is, “Should I form an LLC?” The answer to that question depends on a number of factors, but in most cases, the answer is “no.” Typically, the only maritime professionals who benefit from forming an LLC are captains who meet the criteria set forth by the IRS to qualify as independent contractors. These criteria can be accessed directly on the IRS website under Topic 762, Publication 15-A, or Publication 1779. It should also be noted that more vessels are coming into compliance with U.S. payroll tax laws, meaning crewmembers are being issued W-2s with taxes withheld. When given the option to be paid as a W-2 employee with taxes withheld, I normally recommend this route.
While there are advantages and disadvantages to doing business as an LLC, it is important that those using such a tax structure have a clear understanding of why they are doing business as a company. It is also important to understand the relationship they have with that entity. All too often, I consult with new clients who are operating as an S Corporation or LLC, only to realize they do not fully understand the structure.
As stated above, I am seeing less need for crewmembers to incorporate or form an LLC. However, there are still valid reasons to do so. Some crewmembers work on foreign-flagged vessels and are concerned about the undocumented nature of their income. Others work for owners who mandate they form an LLC, and some crewmembers take freelance jobs, making the flexibility of having a company advantageous. Whatever the reason for forming the company, it is important that the crewmember understands the basic reasoning behind the decision, the pros and cons of doing business as a company, and—more importantly—how the entity is taxed and what their responsibilities are in maintaining it.
Another point to consider is whether the crewmember intends to purchase a home in the next two years. Lenders typically prefer to see a consistent income structure over a two-year period. For example, if a crewmember earned W-2 income in year one, the lender may expect year two to reflect the same. I have worked with clients who were denied loans because they were an “employee” one year and a “contractor” the next. This is further complicated by the fact that luxury yacht crewmembers already face challenges when applying for home loans, as lenders often do not understand the industry.
If you are currently between jobs, it may be worth waiting to form an LLC until you are close to signing onto your next program. Some taxpayers form an LLC only to later discover that their next employer will only pay them as an “employee.” Often, the employer has no discretion in how they categorize a crewmember—as either an “employee” or a “contractor.”