Do yacht crew members have to pay U.S. taxes if they work overseas?

Yes. U.S. citizens and green card holders are taxed on worldwide income, even if they earn wages outside the United States. Yacht crew may qualify for the Foreign Earned Income Exclusion (FEIE), but must still file a U.S. tax return. McGregor Financial Services helps yacht crew determine eligibility and optimize their filings.

What tax forms do yacht crew members usually file?

It depends on employment type. W-2 employees typically file Form 1040. 1099 contractors file Form 1040 with Schedule C to report self-employment income and deductions. Nonresident aliens working in the U.S. usually file Form 1040NR. McGregor Financial Services specializes in all three.

Can yacht crew deduct travel and work-related expenses?

Yes. 1099 independent contractors can deduct yacht crew-specific expenses such as travel between assignments, training, certification costs, uniforms, safety gear, and crew-related equipment. McGregor Financial Services ensures deductions are maximized while remaining IRS-compliant.

What happens if yacht crew don’t pay quarterly estimated taxes?

The IRS requires quarterly estimated tax payments for self-employed individuals or those with 1099 income. Missing payments can result in penalties and interest. McGregor Financial Services offers Quarterly Crew Services to keep filings on time and accurate.

Why should yacht crew use a specialized marine tax accountant instead of a general CPA?

Marine professionals face unique challenges: fluctuating contracts, offshore income, and multi-jurisdiction compliance. A general CPA may miss deductions or misapply residency rules. McGregor Financial Services, based in Fort Lauderdale, specializes in yacht crew taxation and marine accounting.

Yacht Crew Taxes in 2025: IRS Audits and Red Flags Every Crew Member Should Know

Sep 24

Written By Justin Boodram

By McGregor Financial Services
(Updated 2025 — with IRS guidance and yachting industry insights)

For many yacht crew, taxes feel like a gray area. Paid offshore, paid in cash, or paid through a management company under a foreign flag — it’s easy to assume the IRS isn’t paying attention. But in 2025, the enforcement environment is shifting.

The IRS has increased its focus on high-income earners, gig economy workers, and those with international income streams. Yacht crew often fit all three categories.

This article breaks down:

How crew income is taxed under U.S. law
Common mistakes that trigger IRS audits
Red flags specific to yacht crew
What to do if you’re selected for an audit
How to reduce your risk in the first place

1. How Yacht Crew Income Is Taxed

U.S. Citizens and Green Card Holders

Taxed on worldwide income no matter where the yacht is flagged or where the work is performed.
Wages, tips, and bonuses must all be reported on a Form 1040.
Foreign Earned Income Exclusion (FEIE) may apply, but only if the crew meets strict bona fide residence or physical presence tests abroad.

Nonresident Aliens (Foreign Crew)

Taxed on U.S.-source income, including wages earned in U.S. waters.
Typically reported by the employer on Form 1042-S or W-2 depending on classification.
May benefit from tax treaties between the U.S. and their home country (if one exists).

Offshore Contracts and MLC Compliance

The Maritime Labour Convention (MLC, 2006) ensures contracts and working conditions but does not eliminate U.S. tax obligations.
Being MLC-compliant or working for a Cayman/Marshall Islands entity does not exempt a U.S. citizen from IRS reporting.

2. Common Mistakes That Trigger IRS Attention

Not reporting tips: Cash tips are taxable income and one of the most common omissions.
Relying on “offshore pay” myths: Payment through a foreign entity doesn’t remove U.S. tax liability.
Claiming the FEIE without meeting tests: Crew often miscalculate days abroad or count “days at sea” incorrectly.
Incorrect filing status: Crew using contractor status when they function as employees can raise red flags.
Not filing at all: The IRS receives payroll data, foreign bank disclosures, and even whistleblower reports — failure to file leaves crew exposed.

3. Red Flags Specific to Yacht Crew in 2025

1099 income for full-time roles: The IRS knows that full-time engineers, stews, or chefs under one yacht are more like employees. Misclassification is a key enforcement target.
High income with low reported expenses: A U.S. captain earning $200,000 but showing no housing, travel, or meals could raise suspicion.
Foreign bank accounts not disclosed: U.S. crew with accounts over $10,000 abroad must file FBAR (FinCEN 114). Non-filing is a serious red flag.
Large deposits without matching reported wages: Banks share suspicious activity reports — if wire transfers or lump sums don’t align with reported income, audits follow.
Inconsistent filings year-to-year: Reporting income one year, then nothing the next, when still visibly working in yachting, may trigger an IRS query.

4. What Happens During an Audit

An IRS audit can take several forms:

Correspondence Audit: A letter requesting clarification or documentation.
Office Audit: Crew are asked to meet at an IRS office with records.
Field Audit: IRS agents examine records in person — rare but possible for high-value cases.

Documents commonly requested:

Employment contracts (including MLC contracts)
Pay slips or wire receipts
Bank statements (domestic and foreign)
Travel logs or vessel itineraries (to verify FEIE eligibility)
Tip records

If discrepancies are found, the IRS can assess additional taxes, penalties, and interest. In serious cases, willful noncompliance may lead to fraud charges.

5. How Crew Can Reduce Audit Risk

Report all income: Wages, tips, and bonuses — regardless of payment method.
Keep records: Maintain contracts, bank statements, and itineraries.
Be cautious with FEIE: Only claim if you clearly meet the requirements.
Disclose foreign accounts: File FBAR and FATCA (Form 8938) when thresholds apply.
Ask about classification: If you’re on a 1099, question whether that’s appropriate.
Work with marine-specialized advisors: Accountants who understand yacht crew tax rules can prevent mistakes before they happen.

In 2025, yacht crew remain in the IRS spotlight. The combination of international pay structures, offshore contracts, and frequent travel makes this community both unique and vulnerable.

Red flags like unreported tips, misuse of the FEIE, or misclassification can quickly lead to audits — and costly surprises. The safest course is proactive compliance: track income carefully, disclose foreign assets, and get professional guidance.

Smooth seas may be out of your control, but your tax compliance doesn’t have to be.

Get In Touch With MFS

Justin Boodram