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AvMar begins withholding US taxes from foreign crew

Ft. Lauderdale-based AvMar Payroll Services, one of the industry’s largest yacht crew payroll companies, has begun withholding U.S. income taxes from foreign crew while working on vessels in the United States.

The practice runs in the face of long-standing traditions of non-resident yacht crew not paying tax on their yacht income, and some worry it could open yacht crew to a whole host of problems.

“I’m concerned about this on two levels: immigration and hiring,” said the non-U.S. captain of a 130-foot Cayman Islands-flagged yacht based year-round in Florida. This captain, who asked not to be named, processes payroll for his crew of eight non-U.S. crew through AvMar and is worried.

“The boat spends eight months in the U.S.,” he said. “I was told by AvMar that the crew had to prove they were not in the United States more than six months. That will raise immigration issues. And I’m concerned that hiring future crew will be tough when I tell them that 15-20 percent of your income will be in taxes. They’ll just go to another boat so my labor pool has just shrunk.” 

The method of paying yacht crew varies depending on the yacht, the owner, the individual crew member and the payroll process used. Many captains choose to operate as independent contractors, legally giving their employer a way to not withhold tax, with the presumption being that the contractor’s company will withhold and pay taxes to the appropriate taxing authority. 

However, many common yachting countries don’t require their residents to pay taxes on income they earn in other countries, so yacht crew from the UK, France and Australia enjoy tax-free income while working in the Caribbean, Mediterranean and United States. 

And that’s legal, at least from their country’s perspective.

But it’s not legal in the United States, according to tax attorney Glen Stankee, an international tax partner with Akerman Senterfitt, the largest law firm in Florida and the legal opinion behind AvMar’s recent methodology.

2 HR Issues You Cant Ignore | Health and Wealth the Dream of Your ...

When a worker is properly classified as an employee, the employer must pay social security tax of 6.20% and Medicare tax of 1.45% of gross wages. The employer is generally obligated to also pay workers’ compensation insurance and federal and state unemployment tax (generally 3.5% for a new employer in Florida). Assuming that the workers’ comp premiums are 3% of gross wages, the total burden rate is 14.15% of gross wages, before applying the cost of employee benefits. It’s no wonder that so many employers are attempting to classify workers as independent contractors, especially in our current economic environment. However, the consequences of improper classification can be significant and potentially retroactive for the employer.

The initial determination of whether a worker is an employee or an independent contractor comes down to whether the company directs and controls the worker. If the answer is yes, then most likely that worker is an employee. The IRS developed a 20 factor “test,” to assist companies in determining the proper classification of a worker, which includes such topics as the level of instruction and training provided by the company, the flexibility or lack of flexibility of the worker’s schedule, and a company’s demand for full-time work. The IRS also allows a company or a worker to file Form SS-8 for an IRS determination of worker classification. The IRS believes that workers often file an SS-8 to challenge their own treatment as an independent contractor by a company. This action has costly ramifications. If a regulatory agency reclassifies an independent contractor as an employee, a number of issues and questions are presented. At a minimum, the IRS will charge an employer for back taxes, including the associated interest and penalties. The interest and penalties can be significant, especially since the taxes should have been paid on a quarterly basis in a prior year or years. If the reclassification determination is retroactive to a prior year, the question comes up regarding whether the employee should have been covered by the company health and retirement plans. What if the employee experienced a significant illness while previously classified as an independent contractor and was therefore not covered by the company’s health insurance plan? Can that employee now file a claim for reimbursement? What about the employer’s matching contributions in the company’s 401(k) plan that the employee would have been entitled to receive in prior years? Many employers were shocked when they opened their 2010 unemployment rate notice in December and found out that their company was maximum-rated at 5.40%. Even though recent legislation in Tallahassee has temporarily reduced some employers’ rates, most employers still experienced a noticeable increase over 2009 rates after the revised rate notices were prepared by the state. Proper unemployment claims administration can achieve significant cost savings and should focus on the following three areas: 1) The actual claim that may result when an employee is terminated, 2) the information on the quarterly benefit statements and 3) the information on the annual rate notice.

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