by Tom Andrews, CPA
Now that 2021 has ended it is important for crewmembers to have an understanding as to how the vessel views the services you provide. All too often crewmembers and the vessel owner will define their 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 attempting to prepare the their tax return after the year has ended.
In it’s simplest form a crewmember will work for one employer during the entire year and at the end of the year that employer will issue the crewmember a form W-2. Under this scenario the tax process is relatively simple and the tax payer in most cases can use an off the shelf tax software to prepare their taxes. All too often the crewmember has worked for multiple vessels during the year including both foreign flagged and US flagged. As we work with the crewmember to determine the nature of their income we must also contemplate how the employer views their services as well.
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 can be a 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 more tax than they 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.