He makes a lot of money, but we do not know how to protect his income from extreme taxes. Does anyone know who we can talk to or where we can invest to protect his income? This is his first year to do this. Thank you!
2007-10-15 09:23:53 · 6 answers · asked by Krystal 3 in Business & Finance ➔ Taxes ➔ United States
Are you saying that they don't take out social security, medicare or worker's insurance, either?
Working offshore is not a way of avoiding taxes. If the ship is owned by a US company and within American exclusive economic zone (up to 200 miles from shore), his income is an American source income and fully taxable. If the ship is further from shore, but homeports on US soil, it's still an American source income. Hopefully, your boyfiend's employer is not trying to dodge the employer's portion of these taxes!
Off hand, I would guess that you should be taking out about 30% of gross pay for estimated tax payments, but you can be a lot more precise by following the rules provided by the IRS (see Bostonian's answer).
You can also make voluntary payments to cover your social security taxes throughout the year. Come tax time, you'll be responsible to pay them if they weren't withheld. This will be a total of 7.65% of gross pay above and beyond your estimated payments for income tax.
It's nice to follow the rules and make the estimated payments throughout the year, but as far as I know, you won't be penalized unless you miss the January 15 deadline. That's the day you have to be sure that all of your federal taxes for the year have been covered. Your tax return is due April 15, but the payments are due in January.
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Bostonian is right about the self-employment tax only if your boyfriend is an independant contractor, and it sounds like he fits the definition of an employee. In order to be an independant contractor, he has to be providing a service to the ship that is outside the normal routine of the ship's business. For example, if he's doing canning or fishing for the ship, the ship is his employer because that's what the ship was built for. But if your boyfriend is a plumber, technician or something else, the ship can make a case that they've hired outside their labor pool to cover these things while it takes care of the fishing and canning.
Other ways of proving you're not self employed:
--No control over the price you charge for your services
--No control over your hours or work schedule
--You don't have any other clients (ships)
--You don't have a business license
--No staff supporting your work, like a secretary and sales staff
--You don't control the quality of your work (your "client"--the ship-- performs frequent evaluations and has an incentive program for rewarding quality and efficiency, such as raises and promotions)
When your employer has control over these details, you're employed. When YOU have control over these details, you're your own boss. These are precisely the things the IRS looks for when a dispute arises over an employer-employee relationship.
2007-10-15 09:41:05 · answer #1 · answered by Anonymous · 0⤊ 0⤋
IF taxes are not being taken out, he's being paid as an independent contractor. He is responsible for both income taxes (State and Federal) as well a Self-Employment taxes. There is nothing he can do with the income to protect it from taxes, other than maxing out an IRA or SEP-IRA.
He needs to make quarterly estimated payments using Form 1040-ES to avoid penalties for underpayment of taxes at filing time. He can get the package on the IRS website. There are worksheets that will help him work out how much he needs to pay. He may need to reserve between 30% and 50% of his total income for taxes depending upon how much he earns and whether or not his state has an income tax.
He gets no break for working off-shore. No idea where "The Queen..." gets her information, but it certainly isn't US tax law! You may be able to exclude foreign earned income from tax up to a limit, however being in international waters is NOT the same as being in a foreign country under US tax law.
2007-10-15 09:28:11 · answer #2 · answered by Bostonian In MO 7 · 1⤊ 0⤋
I add to the other answers:
He needs to talk to his employer. If the boyfriend has mistakenly instructed the employer to not withhold taxes, the boyfriend needs to correct this immediately. Just guessing, but I think this is what has happened.
Your boyfriend can also establish a retirement account. If the employer offers one, he can participate. Or he may invest in an IRA, but if he make "a lot" of money, that IRA may not be deductible. It he cannot do a deductible IRA, he should do a Roth IRA. He should set this up now and not wait until the last minute.
There is no way to invest taxable income once it is received and avoid income taxes on that income, with the exception of an IRA or HSA. However, he needs to plan to pay these taxes by appropriate withholding.
In the case he is in fact self-employed, he needs to set aside 35% of his gross pay to pay taxes, and send in estimated taxes now and in January, to avoid penalties for underpayment. If he has underwithheld taxes and needs to catch up, he should send in estimated taxes in this case as well.
Forms for estimated taxes:
http://www.irs.gov/pub/irs-pdf/f1040es.pdf
2007-10-15 11:16:20 · answer #3 · answered by ninasgramma 7 · 0⤊ 0⤋
Take with a CPA. If he is not within the boundaries or the USA his salary may not be taxed. He would need to be more than 3 miles offshore for that to kick in.
2007-10-15 09:27:59 · answer #4 · answered by ♥♥The Queen Has Spoken♥♥ 7 · 0⤊ 1⤋
Talk to a tax accountant.
2007-10-15 09:29:45 · answer #5 · answered by jplrvflyer 5 · 0⤊ 0⤋
Go to www.irs.gov; check into paying extimated taxes
2007-10-15 09:27:18 · answer #6 · answered by wizjp 7 · 0⤊ 0⤋