Finance

U.S. Taxes: A 2020 W-4 Update

13 April 2020By Tom Andrews
iStock/Shivendu Jauhari

Written by

Tom Andrews

This tax advice is not intended, and cannot be used, to avoid any penalties as a result of taking any position from this column. Thomas Andrews is a CPA and a principal of AvMar Accounting Services. +1 954 764 0404; www.avmaraccounting.com

For the first time in years, the IRS has updated the format of the form W-4. Without this form, the employer will not know how much tax to withhold from the employee's salary. After the tax reform act eliminated the deduction for dependents, the IRS was required to update the form W-4 to account for these changes and provide the employer a more accurate way to project tax withholdings.  

While there are still a large number of foreign-flagged vessels that still disregard U.S. payroll tax laws, the number of vessels coming into compliance is slowly increasing every year.

While you might have taxes withheld from your salary, it is possible you will have to complete one of these forms in the near future. As the payroll processes in the yachting industry become more formalized, the number of crew being treated as statutory employees has increased dramatically over the past 10 years. As a result, crewmembers are having taxes withheld from their wages and are being issued W-2s at the end of the year. While there are still a large number of foreign-flagged vessels that still disregard U.S. payroll tax laws, the number of vessels coming into compliance is slowly increasing every year.

Working as a W-2 employee has benefits as it helps crewmembers avoid owing taxes at the end of the year — as the withholdings should be relatively close to the amount of taxes that would otherwise be due on the crewmember’s tax return. Another benefit is that the crewmember will now have a proper W-2 and this sometimes assists lenders with the income verification process when purchasing a home. It should also be noted that being a W-2 employee can in some cases reduce the cost of tax preparation at the end of the year. Some taxpayers have resorted to forming companies or other complicated tax structures simply because the employer is not withholding any tax at the sources.

It should be noted that just because the employer is withholding taxes from the employee’s salary does not mean the employee will not owe any taxes at the end of the year. If the employee does not complete the W-4 correctly, they might find they still owe taxes on their salary. 

A common example of why an employee might owe taxes occurs when a married couple is working and they don’t complete their respective W-4 forms correctly. For instance, when a married individual is completing his or her payroll forms, they will be asked if they are filing single, married filing jointly, or head of household. If one of the spouses chooses the wrong classification, the employer might not calculate the taxes correctly and as a result, there is an incorrect portion of the employee’s salary withheld for taxes. 

Unless you’re single, I would recommend that any yacht crew have the payroll processing company clearly walk them through the W-4 when completing it or ask for a copy and forward it to your accountant so they can confirm that enough taxes are being withheld from your salary.  

The column originally ran in the April 2020 issue of Dockwalk.

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