As a crewmember on a foreign-flagged vessel, you are probably being paid in one of three ways:
- You’re issued a W-2 with taxes withheld.
- You’re working as a “contractor” and receive a 1099 at the end of the year.
- The employer is simply depositing funds to your bank account without providing a W-2 or 1099.
The purpose of this column is not to opine on the proper payroll procedures of your employer and whether or not the employer is compliant with United States payroll tax law. Compliance is a discussion between your employer and their attorney/accountant. It’s important to stress just how important it is for the taxpayer to understand their relationship with the vessel.
It’s important to stress just how important it is for the taxpayer to understand their relationship with the vessel.
You should be asking yourself if you are an employee or contractor — the difference between the two will affect how much tax you ultimately owe. In most cases, your crew contract will clarify the nature of your services as employee or contractor. However, there are instances in which the contract is vague or you don’t have a contract. If it’s unclear whether you’re an employee or contractor, you may refer to www.irs.gov for guidance on the criteria that the IRS uses to make this determination.
Another layer to crew compensation occurs when you’re a crewmember of a foreign-flagged vessel employed by a foreign entity. Under these circumstances, you MIGHT not be required to pay Social Security and Medicare taxes. The exemption from Social Security tax is attributed to a section of the Internal Revenue Code that addresses American crew of foreign-flagged vessels. The dilemma occurs when you’re trying to prove your status, as you will want to be able to provide documentation supporting your claims.
Assuming that you have properly filed your tax returns, there are situations in which you must prove that you were in fact a crewmember of a foreign-flagged vessel. These situations include, but are not limited to, an IRS audit, state employment tax audit, or income verification as part of a home loan. If you’re ever faced with having to prove you were crew on a foreign-flagged vessel it will probably occur after you have left the employment of that vessel. Trying to track down documents after you have left a vessel can be difficult and should be acquired prior to leaving the vessel. These documents include but are not limited to the following: Vessel Certificate of Registry, crew manifest on vessel letterhead, and a letter from the employer confirming status as a crewmember of a foreign-flagged vessel.
Employment in the yachting industry is not a traditional career. Sometimes outsiders will not understand the differences between this industry and mainstream employment, which makes having supporting documentation all the more important when dealing with individuals who are tasked with understanding the nature of your employment.
This article originally ran in the October 2020 issue of Dockwalk.