Finance

Understanding Your Year-End Tax Documents as Yacht Crew

1 March 2022 By Tom Andrews
illustration of taxes
iStock/filo

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

Now that 2021 has ended, it’s important for crew to have an understanding about how the vessel views the services you provide. All too often, crew and vessel owners define their relationship differently. Sometimes they’ll come to an agreement as to how they’d like their relationship to be defined — however, the IRS may define that relationship differently. This confusion may have adverse consequences when attempting to prepare a tax return.

In its simplest form, a crewmember will work for one employer for the entire year and at the end of the year, that employer will issue a W-2 form. Under this scenario, the tax process is relatively simple and the taxpayer can use off-the-shelf tax software to prepare their taxes. But all too often, the crewmember has worked for multiple vessels during the year, including foreign- and U.S.-flagged vessels. While determining the nature of their income, we must contemplate how the employer views their services.

Unfortunately, many crew aren’t aware how their relationship is defined. In the eyes of the vessel/owner, they’re simply a “crewmember.” While technically, you are, 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 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 1099s or W-2s?
  • Are you working for a foreign- or a U.S.-flagged vessel?

One common mistake that crew make is thinking that the vessel won’t 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 owing more tax than they originally planned because the yacht payroll manager issued them a 1099 when 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 U.S. payroll tax law.

If you want to avoid a year-end surprise, I’d recommend communicating with your yacht’s 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.

If you’re working on a yacht and aren’t having tax withheld from your paycheck, this should automatically prompt a call to your home office for clarification. Once the year is over, you’re in a reactive situation instead of proactive.

This article originally ran in the March 2022 issue of Dockwalk.

 

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