If your employer is withholding tax from your salary, you have probably been asked to complete 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 to provide the employer a more accurate way to project tax withholdings.
While you might have taxes withheld from your salary, it is possible you will have to complete one of these forms soon. As the crew payroll processes becomes 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 several foreign-flagged vessels that are disregarding 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. It helps crewmembers avoid owing tax at the end of the year as the withholdings should be relatively close to the tax amount that would otherwise be due on the tax return. Another benefit is a proper W-2 can assist lenders with the income verification process for purchasing a home. It should also be noted that being W-2’d can, in some cases, reduce the cost of tax preparation, as a crewmember with a single W-2 and no other income can probably self-prepare their tax return. Some taxpayers have resorted to forming companies or other complicated tax structures simply because the employer is not withholding tax at the source; this sometimes can be avoided if the crewmember is treated as an employee with taxes withheld at the source.
It should be noted that just because the employer is withholding tax from the employee’s salary does not mean the employee won’t owe tax at the end of the year. A common example of why an employee might owe tax occurs when married couples are each working, and they do not complete their respective form W-4s correctly. For example, 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, an incorrect portion of the employee salary is withheld for taxes.
Unless you’re single, I recommend that you have your employer walk you through the W-4 preparation or ask for a copy and forward it to your accountant so that they may assist with the form completion. Further instructions and examples can be found at irs.gov.
This article originally ran in the March 2023 issue of Dockwalk.