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Most yacht captains operate as small businesses

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When last we surveyed yacht captains and crew about their pay, we asked technical questions such as how often they were paid and how they received their compensation (digitally or the old-fashioned way).

During that discourse, a few captains noted that we should have asked if captains worked as employees or as contractors through their own corporations. So, this month, we asked about that.
Eighty-two yacht captains completed our survey, but when considering the results, know that more than 80 percent of our respondents were American and about a third are on vessels less than 100 feet.

First things first: How do you collect your income?

Most captains — 70.9 percent — are not employees. The most common way to collect income was through a small business corporation, which in the United States is called an S Corp. More than 44 percent of respondents are employed this way. About 7.6 percent more are employed through an LLC, a limited liability corporation.

“Most savvy and highly professional U.S. yacht captains have their own LLC or similar,” said the captain of a yacht 100-120 feet. “Not only is it a form of a buffer from liability (as captains, we take on a lot of liability responsibility) but it can also be a way to pay less overall tax to the U.S. government if you use expense deductions and pay yourself an income as an employee of the corp. Corporate tax is less than payroll if you report both, as advised by your tax adviser.

“Many foreign captains I talk to don’t even report their income when it is originated from out of their country but we as U.S. citizens do not have this luxury. We are supposed to report and file all income, no matter where in the world we are or where we get it. Of course, that is if one plays the game by the rules.”

“Americans are screwed, tax-wise,” said an American captain in yachting more than 25 years.

“If you claim to be a licensed professional, then become one and legitimize your operation,” said the captain of a yacht 140-160 feet. “Take advantage of the benefits if you can. If your employer is an employer, it might not be worthwhile, but for most of us, the owners are not employers; they are our No. 1 customer.”

Another non-employee method of payment is directly as an independent contractor (19 percent).

“I prefer the (potential) freedom of being an independent contractor,” said a captain in yachting more than 30 years. “In my experience, owners think and act much more professionally about the relationship than if I were ‘just an employee’. I am free to do what is right, and to work with the owner for his and his guests’ enjoyment rather than being just ‘another employee.’

“I say potential freedom because the independent contractor relationship has worked so well that I am currently at eight years with same owner.”

Among those captains who are employees, it was more common to be an employee of the yacht’s corporation; 20.3 percent of respondents are paid this way. Just 8.9 percent are employees of the boss’s corporation.

“It’s best to get on the boss’s corporate payroll, that way you start paying into social security,” said a captain who is paid through his S Corp. “Also, you get better disability coverage.”

One respondent said he is paid in cash.

In addition to knowing the how, we wanted to know Why do you collect your income this way?

The most common reason is for tax purposes (46.7 percent of respondents).

“Just about everything we buy for our business, from sunglasses to dive gear, we can buy with pre-taxed dollars,” said a captain paid through his LLC. “To me, that makes sense.”

“We dedicate a lot more time to our jobs than the average profession requires,” said the captain of a yacht less than 80 feet. “Many of our expenses can be legally written off because we are constantly working. You’ll get a greater tax advantage if you work through your own corporation. I save a few thousand dollars per year this way.”

The next common reason — for 29.3 percent of respondents — was because the captain’s accountant or tax advisor recommended it be taken that way. (If we assume that recommendation is for tax purposes as well, that means 76 percent of captains collect their income in a way most advantageous for tax purposes. Not really surprising.)

Of those captains who use the S Corp. to collect their income, all but two do so for tax purposes or because their accountant recommended it.

The remainder — just less than a quarter of respondents — said the boss insisted on paying that way. We were curious which captains might not take their income in the most tax-advantageous way, so we looked at this group a little more closely. The bulk of these captains — 65 percent of this group — are paid as an employee of the yacht or the owner’s corporation.

One captain said he was paid partly from the corporation for insurances coverage requirements, the rest directly for tax purposes. He is in a category of his own.

We were curious if something in a captain’s career prompted him/her to change the way they were paid, so we asked Have you always collected your yacht income this way? (82)

The results were fairly evenly split, with a slight majority (51.2 percent) saying yes, they had always collected their income this way.

That left 48.8 percent noting they had changed the way they handled their income over the course of their careers.

“A lot depends on dependents and benefits, but I have done both and if the employer pays for my family insurance and pays me through my corporation, I do that,” said the captain of a yacht 100-120 feet. “As it is now, my employer offers to match 401(k) up to a certain percentage, a good medical and dental plan with life insurance for all, profit sharing, proper vacation/sick days that get paid if not used, etc.”

Among those who have changed, we wanted to learn more, specifically What made you change? (42)

Nearly three-quarters changed because they either changed the way they handle their taxes or their accountant recommended the change.

“I was also advised by a maritime lawyer” to change, said a captain in yachting more than 25 years.

“I began to work on foreign-flagged yachts,” said the captain of a yacht 160-180 feet.

“The owners think it limits their liability and they leave all the payroll issues to me,” said a captain in yachting more than 20 years.

In talking to captains while researching this month’s survey, one suggested we ask Do you have an employment contract?

Most — 51.9 percent — do not. While that may seem surprising in today’s uber-professional yachting environment, it should be noted that about a third of respondents are on yachts of 100 feet or less.

“I do not have an employment agreement as I am not an employee,” said a captain who operates through an S Corp. “I do have a 60-page operations manual that describes how I will direct, coordinate, operate and manage the vessel and its crew and guests. This is read, edited and approved by my customers, then I go to work based on that being our agreement as to how things are done. The financial agreement is given to me by the customer and the action of it constitutes the standard.”

“It’s better to try and get an employment agreement in writing to clarify the terms of employment,” said a Canadian captain in command of a vessel less than 80 feet. “Many owners are so reluctant to commit the employment terms to paper. They seem to prefer to leave it as a verbal agreement with a handshake.

“The owners I have worked for did stick to the verbal agreement terms, but it is better to have those terms in writing, especially if the relationship goes sour for whatever reason.”

Of those with contracts, the largest group (17.3 percent) indicated theirs was generated by the owner (and perhaps modified by them).

About 14.8 percent generated their own employment contract.

And 12.3 percent indicated their contract was generated by the management company.

Just 3.7 percent said their contract was generated by the flag state.

“Get your deal in writing,” said a captain in yachting more than 20 years. “Things tend to change after the honeymoon.”

Here’s another question suggested by a captain: If you are paid through your corporation, does the employer offer more gross pay to compensate for payroll taxes?

On the surface, it seems like an outlandish question. If the annual salary is $100,000, would the owner pay $135,000 to offset the tax burden? It seemed unlikely, and indeed it is. About 86.9 percent of respondents said no, the boss didn’t give any extra money for the tax liability.

But that left 13.1 percent of captains who said yes, the boss did pay a little more.

Do you use a tax professional?

Most — 82.7 percent — do.

“I recommend that every captain and/or team have a trusted tax advisor who tells them not just what they want to hear but what the issues and consequences are for each type of business arrangement,” said the captain of a yacht 120-140 feet.

“A good accountant is worth their weight in gold,” said a captain in yachting more than 10 years.
Among those who don’t — 17.3 percent — all are employees or independent contractors. None operate under their own business.

This was another question suggested by a captain, and perhaps we should have delved a bit deeper to learn more. If you work through your corporation, are you eligible for employer offered benefits?

The largest group — 44.4 percent — are not eligible for benefits such as health insurance. And about a quarter more don’t get the benefits directly but are reimbursed by the owner for such expenses.

It was interesting to note that 30.2 percent of captains noted that they are eligible for employer-offered benefits, even though they are employed through their own corporation. As previously noted, it would have been interesting to learn more about how that works.

We were curious to know if the “boss insists” option was really that strict, so we asked Have any employers refused to pay or hire you through your corporation as opposed to paying/hiring you as an employee? (69)

The bulk of respondents — 92.8 percent — said no.

That left 7.2 percent of captains who have run into this situation in their careers.

And because there is a perception (real or not) that U.S. captains may not earn as much in a career because of U.S. tax rules about foreign-earned income, we wanted to know if working for U.S. employers mattered in the grand scheme of things, so we asked Is working for a U.S. employer easier or more difficult than working for a non-U.S. employer as far as the employer-employee structure is concerned?

Most captains — 53.1 percent — said there was no difference.

A little less than a third — 31.3 percent — said U.S. employers were easier.

And about 15.6 percent of respondents said U.S. employers were more difficult.

Another thing queried captains wanted to know was Do you only employ yourself through your corporate entity or do you employ other members of your crew?

Most — 69.5 percent — employ just themselves.

But the bulk of the rest — 25.4 percent — employ at least some crew through their corporation. While we didn’t ask this question specifically, that portion may include many couples.

Just three respondents — 5.1 percent of respondents — employ all crew through their corporation. We didn’t ask how many “all” was, but two of the three are on vessels 80-100 feet so it’s possible they are couples. One respondent, however, runs a yacht of 120-140 feet and pays all the crew through his LLC.

For those captains who operate through a corporation, several wanted to know of their colleagues Do the expenses of the boat go through your corporate account?

Most — 79.4 percent — do not.

Still, that means more than 20 percent do.

One of the big issues for the U.S. tax man when it comes to independent contractors is whether that person has other clients. Arguably, if an independent contractor has only one client that he derives all his income from, he technically should be an employee. So we asked If you work through your corporation, do you have other clients/employers?

Most — 57.4 percent of respondents — said they do not.

About 42.6 percent said they do.

 

Lucy Chabot Reed is editor of The Triton. Comments on this survey are welcome at lucy@the-triton.com. We conduct our monthly surveys online. All captains and crew members are welcome to participate. If you haven’t been invited to take our surveys and would like to be, e-mail lucy@the-triton.com to be added.

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