Published Articles

WITHHOLDING RULES FOR CREW

This is one of the more hotly debated tax issues in yachting. It is of course handled in many different ways. The IRS withholding rules effect all of yachting industry. Whether working on a US or foreign flagged yacht or being a US citizen, Resident, or Non Resident it may be an issue of whether or not you take a position on the yacht or can keep others as crew. Understanding the rules that apply to you matter in two instances, when filing your tax return, or when I emphasize at the time of salary negotiation.

All new employees, whether they are Residents or Non Residents must be given a form W-4, Employee's Withholding Allowance Certificate, to complete. However, because of restrictions on the number of personal allowances that a nonresident alien may claim, employers need to provide nonresident employees with special instructions given in IRS Publication 519, US Tax Guide for Aliens. Compensation paid to nonresidents aliens employees for services performed in the US is subject to withholding at the same graduated rates applicable to US citizens and resident aliens. Although employment income is subject to federal income tax withholding at graduated rates, payments to independent contractors and payments that are not effectively connected with a US Business for example interest and dividend income are subject to withholding at a flat 30% rate

In general US income taxes must be withheld from wages paid to US citizens who are working abroad. However, US income taxes do not have to be withheld under the following exceptions:


1) Salary that is expected to be excluded under section 911 of the IRS code (The section of the code that crew live and die by) 2) Salary subject to withholding by a foreign country or US possession 3) If employee expects to be eligible to take a foreign tax credit 4) On a commercial traveler. A commercial traveler is defined by the IRS Code as a non resident alien temporarily present in the US who a) Is present in the US for a period(s) not exceeding a total of 90 days during the taxable year; and b) Receives less than $3000 as salary during the taxable year for services rendered in the US; and c) Is employed by an office maintained by a US business outside the US or by a foreign person not engaged in a business in the US

There are of course many ways to plan around the withholding rules. The use for example of a US Citizen or resident forming a "S" corporation or incorporation and registering the yacht overseas for another. Of course, having the owner's cooperation for the later is needed. Many crews find it awkward and or risky to talk to their employer in this manner. I have developed general guidelines for this situation, which can be accessed, through my website at WWW. Mytaxguru.com or by contacting me directly (954) 763-2829.

In general, under the Internal Revenue Code (Section 3402) must withhold income tax from wages paid to an employee. However, there is nothing that is general about yachting. The definitions of the terms "employer" and "wages" are to be analyzed in detail and with interest to most yacht owners and crew.

Employer is defined in Section 3401(d) as "the person for whom an individual performs any service as the employee of such person.

Wages are defined in Section 3401(a) as all remuneration for services performed by an employee for his employer including the cash value of all remuneration (including benefits) paid in any medium other than cash. This definition includes remuneration for services performed by citizens and residents of the United States as employees of a non-resident employer whether or not such non-resident employer is engages in a Unites States Trade or Business. Regulation 31.3401 (a)-1(b)(7). Section 3401 (a) then sets forth-specific items of remuneration that are excluded from the definition of wages.

Section 3401 (a) (8) (A) excludes remuneration for services for an employer performed by a citizen of the United States if it is reasonable to believe that such remuneration will be excluded from the employee's gross income under Section 911, or if the remuneration is subject to withholding in a foreign jurisdiction.

Section 871 (b) provides that nonresidents alien individuals who are engaged in a US trade or business is taxable on income that is effectively connected with a US trade or business as if they were a US citizen or resident. In general, under Section 864 (b) the performance of personal services within the US constitutes a US trade or business.

Now for yachting industry listen up. Section 861 (a) (3) provides that compensation for personal services performed in the US will not be deemed to be income form sources within the US if

1) The labor or services are performed by a nonresident alien individual temporarily present in the US for a period(s) not exceeding a total of 90 days during the taxable year, 2) The compensation does not exceed $3000 in the aggregate, and 3) The compensation is for services performed as an employee of or under contract with: a) a non resident alien or foreign corporation or foreign employer not engaged in trade or business within the US (non chartering) or b) an individual who is a US citizen, or domestic employer, if such services are performed for an office or place of business maintained in a foreign country or US possession by such individual or corporation.

Additionally, a resident alien may be eligible for an exception from withholding based on an income tax treaty with the resident alien's country of citizenship. This situations must be analyzed on a case by case basis; however, generally the employer must forward to the IRS a statement from the employee claiming the treaty benefit in order to avoid withholding.

Now the question is what to do for non-resident aliens who are either working for a US owner or working in the US.

A non-resident alien has no obligation to have US income tax withholding for services performed outside the US.

1) The first exception listed under Section 861 (a)(3) may relieve duty to withhold income tax. Therefore, the exception will apply to qualifying wages paid so long as the employee is not engaged in a US trade or business 2) The second exception listed under Section 861 (a)(3) could also relieve withholding duty with respect to all wages paid to nonresident aliens with respect to services performed in the US. However, this would require a determination that the crew is engaged in transportation between the US and a foreign country or US possession. However this exception was enacted with the Taxpayer Relief Act of 1997 (P.L. 105-34), and it currently seams that this exception is direct to crew members of cargo vessels or cruise liners, which travel regular international routes. I would argue that a charter yacht with regular established international routes would qualify.

To the extent that a nonresident alien has income covered by this exception, it is not subject to US withholding. Additionally, for purpose of the substantial presence test to determine US residency in taxable years beginning after December 31, 1997 Section 770.1 (b) (7)(D) provides that a nonresident alien individual who is temporarily present in the US on any day as a regular member of the crew of a foreign vessel engaged in transportation between the US and a foreign country or a possession of the US shall not be treated as present in the US on such day unless such individual otherwise engages in any trade or business in the US on such day

The above is all very technical. The US just wants to be sure that it will collect whatever tax it is due. Withholding is one way that the US makes sure that all taxpayer residents and nonresidents pay what they owe. After the taxpayer's tax return is complete, all deductions are taken, then we make sure we pay what we owe, but only what we owe. Any questions please do not hesitate to contact me Eric Yankwitt, J.D. (954) 763-2829. WWW.mytaxguru.com Advisory Tax Service, Inc. 1975 East Sunrise Blvd., Suite 522, Ft. Lauderdale, Florida 33304.

.