Special Rules for Fishers
Many commercial fishermen are not aware that there are special rules relating to when they must pay estimated tax and when they should file their tax returns to avoid an estimated tax penalty. If at least two-thirds of your gross income is from fishing, you may choose either of the following options:
- Pay all of your estimated tax by January 15, and file your Form 1040 by April 15, or
- File your Form 1040 by March 1 and pay all the tax due.
You will effectively avoid an estimated tax penalty if you exercise either of these options. When you file your return, it is important to attach Form 2210-F, Under-payment of Estimated Tax by Farmers and Fishermen. See also the instructions for Form 2210-F.
A fisher who has at least two-thirds of gross income from fishing only has one estimated due date for the tax year. Assuming a fisher has at least two-thirds of their gross income from fishing, the estimated tax payment is not required as long as the return is filed by the first workday of March and all taxes owed are paid by this date.
When you file your return, it may be helpful to attach Form 2210-F, Under-payment of Estimated Tax by Farmers and Fishermen (not required, but helpful). See also the instructions for Form 2210-F.
S Corporations and Partnerships
If a fisher is a 100% shareholder of an S corporation, all net income earned by the S corporation and all of the other items that must be separately stated on the Schedule K-1 will be reported on the fisher's Form 1040 return. If the fisher owns less than 100% of the S corporation, only the fisher's share of the S corporation's items flow to the fisher's return.
In determining whether the individual fisher's gross fishing income is at least two-thirds of the fisher's total gross income, the fisher's share of each type of S corporation gross income (i.e., fishing and non-fishing) will be included in the computation. If the total gross fishing income is at least two-thirds of the total gross income, the fisher is allowed to use the special "fishing" methodology of determining estimated tax payment requirements as discussed above.
The mere fact of incorporating a Schedule C fishing business into and S corporation will not affect the fisher's estimated tax payment requirements unless, as a whole, the fisher's gross income from fishing sources falls below the two-thirds requirement.
If the fishing income on your individual return is from a partnership or S corporation, be sure to complete the "Reconciliation of farming and fishing income" section on Schedule E (Form 1040). The IRS then knows the gross income reported from the partnership or S corporation is from fishing.
Please note that some fisherman may set up S corporations to avoid or reduce employment taxes. There are several court cases that clearly establish the IRS's authority to reclassify payments made to a shareholder as wage expense if the IRS finds the officers compensation to be unreasonable. See S corporations for more details.