Individuals who are temporarily in the United States to serve as crewmembers aboard fishing vessels often have unique and valuable skills. Vessel operators, however, must be aware of the federal income tax complexities that may accompany the hiring of nonresident aliens.
Those who are faced with this little known area of the tax law should study Publication 519, U.S. Tax Guide for Aliens, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Although there are general rules when dealing with nonresident alien workers, Tax Treaties are especially important to understand because the treaties can provide very different rules and can override the Internal Revenue Code.
Who is considered a nonresident alien?
If under the general rules or a treaty provision a person is not a resident, then the nonresident alien rules apply. A resident alien is subject to the same tax law as any U.S. citizen.
- An individual who has a green card is automatically treated as a resident.
- An individual who is physically present in the U.S. at least 31 days in the current calendar year and 183 days or more during the current and two preceding years is also considered a resident.
The 183 days is computed by adding 100% of the days in the current year, one-third of the days in the first preceding year and one-sixth of the days in the second preceding year. (Caution: Special rules apply to students!)
Foreign Crewmembers and Tax Identification Numbers
Any individual working in the U.S., including coastal waters, must provide a Taxpayer Identification Number (TIN).
If the individual will be performing services only when the vessel is operating outside the territorial waters of the U.S., then the foreign worker has not earned U.S. source income and the compensation is not subject to income tax withholding.
However, if the individual performs services within territorial waters and is a nonemployee, the compensation paid to the individual may be subject to a withholding rate of 30% of the gross amount paid. IRC section 1441 requires such withholding. The vessel operator paying the compensation deposits the 30% withholding on a monthly basis in a federal depository using Form 8109, Federal Tax Deposit Coupon . No later than March 15 of the year following the tax period during which the compensation was paid, the payer must file Form 1042 with the Philadelphia Service Center. Plus, the payer must issue Form 1042S to the nonresident crewmember listing the compensation paid and the withholding amount, if any. If the crewmember believes the withholding has been excessive, the crewmember must file Form 1040NR to request a refund.
In some cases withholding may not be necessary. Foreign self-employed individuals performing personal services in the U.S. are exempt from U.S. income tax if:
- The individual is in the U.S. for not more than 183 days in the calendar year, or
- The income is not attributable to a fixed base in the U.S. which is regularly available to the individual.
If a nonresident crewmember is relying on a treaty provision in order to be exempted from income tax withholding, then that person must present Form 8233, Exemption from Withholding, to the vessel operator. The form requires citation of the treaty provision being relied upon by the crewmember.
Another situation, which avoids the 30% withholding, is when the nonresident alien treats the nonemployee compensation as effectively connected with a trade or business in the U.S. (a.k.a. ECI). In such cases, the nonresident must report such earnings on Form 1040NR filed with the Philadelphia Service Center. Effectively connected income (ECI) is subject to the same graduated tax rates as applies to U.S. citizens and residents.
Generally, compensation from personal services performed by a nonresident alien is given ECI treatment only when subject to withholding tax under IRC section 3402C where there is an employer-employee relationship (not self-employed). Nonresident crewmembers that are employees of U.S. employers are subject to the same income tax and employment tax withholding requirements as U.S. citizens.
Finally, nonresident aliens receiving crew shares as self-employed crewmembers are not subject to self-employment tax. Please note that it is the vessel's operator that is responsible for proper withholding. The payer of the crew shares may be held liable for the 30% withholding tax even when the withholding did not occur!