Plan on 30% to 40% of net income going for taxes.

June, thanks for your response, Cruising Both Ways . In reply, I absolutely knew I would owe money to the IRS but this year seems to be particularly outrageous. I have no problem paying my taxes (as I have done for my entire working life - the last nine on cruise ships)...as long as it seems within reason.

I made $21,000 last year and only $8,000 of that was from 1099s from the cruise ship job. The remaining income was from my land based job I worked for 9 months and from which all my taxes were deducted.

What I find unbelievable is that I owe $1,800 in taxes!!! And how is it that I am being taxed on income ($11,000 from my land based job) that I've already paid taxes on?

How can someone who makes so little money owe so much? My tax guy said it's because of my land job that I owe so much as it put me in a higher tax bracket. What??? I made $21,000!!! That's nothing! I just can't believe that someone living close to the poverty level would be liable for so much. So, in essence, doesn't $1,800 on $8,000 seem a bit much?

Thanks for your time.

Regards,
Paige



Dear Paige,

I understand your incredulity. Let me explain. Although I may make it clear I can't make you feel better. Wish I could.

Income tax is calculated on entire income. Wages, dividends, alimony, net self-employment income, jury duty pay, etc. are all added together. Were someone to receive a lot of dividends [not this year, of course] or alimony, no tax would have been withheld on that income. If no estimateds had been paid tax would be owed at year-end.

Let's say you made $20,000 in salary but your withholding were incorrectly set for a $10,000 income. You'd owe taxes at year-end. Or conversely were you over withheld as if you were earning $40,000 a year -- you'd get a refund at year-end.

In your case, nothing was withheld on your $8,000 freelance income. If your income tax rate is 7 1/2 % then you'd owe $600 income tax on the $8,000 income.

In addition to that you must pay Medicare and social security tax on your freelance income. That's approximately 15%. $8,000 times 15% = $1,200.

Add them up you get: $600 + $1,200 = $1800.

As a general rule of thumb, I suggest that indies plan to pay 30% to 40% of their net self-employed income on taxes.

Here's more info on taxes .

Best,
June

Cruising Both Ways

Hi June!

I need help! Here's one for you: I am a cruise ship employee from Manasquan, NJ and I've worked for Choppy Cruises for over 4 years.

My issue is that, technically, I am not self-employed but I get a 1099 from Choppy every year. I pay my taxes but this year I owe a ridiculous amount and I'm frustrated!

I have to pay a self-employment tax but I am an employee of Choppy. I wear their uniforms, abide by their contracts and rules of the ship. They pay my flights and feed and house me. I work outside of the USA but my pay is wired directly into my bank account out of their USA bank account. I save my receipts and write off as much as I can. I know some other Americans from the ship who don't pay taxes on their income.

Am I an idiot?

Is there some maritime tax law I don't know about? Is there any way to get around paying the self employment tax?

Please help!!
Paige


Hi Paige,

"Am I an idiot?" My guess is that you are not an idiot. But you do want to have your cake and eat it too. Apparently, you weren't concerned about the probable misclassification as a self-employed until it was disadvantageous to you.

You must decide whether you want to educate yourself on self-employed status and then whether or not you want to take action based on what you learn.


Be sure to read my post Cruise Ship Entertainer Gets No Tax Breaks

By the way, the folks not claiming income are committing fraud. Not good.

I changed the name of your cruise company ... just in case.

Best,
June

Cruise Ship Entertainer Gets No Tax Breaks

Many months ago I received the email below from Charles, a cruise ship entertainer. Charles and I have exchanged email over these months. I had questions for him prompted by my many conversations and correspondence with the IRS. At times I waited weeks for a response from the advanced tax law section of the IRS.

Here's the situation:

Hi June,

I really appreciate your site and what it has to offer... Excellent, clear, understandable advice and information.

Here's my question in two parts: I work as a guest entertainer on cruise ships. I spend most of the year away with a few weeks at home.

I also hire dancers and technicians on the ship for my show and pay them in cash onboard. They are not US citizens and do not get a 1099 from me. I simply have a record of paying them. Do I need to send out 1099's? Is there another way I should do this? It adds up over the year to a considerable amount.

The second part is that if I'm spending 330 days outside the US on the ship, do I qualify for the foreign earned income exclusion? Or, if not, since I pay for meals, etc. is there a per diem amount I can use for those days out at sea or in port in other countries.

There's not a lot of info for us cruise ship workers, but I hope to learn more.

Best,
Charles

I also learned from Charles that the ship is registered in the Bahamas and he is paid by the cruise line. He visits up to 20 or more countries each year and is in US ports sometimes for a few hours. He's in international waters about 95% of the time.

When not on a ship he lives in Las Vegas, Nevada. He has a house there and a Nevada driver's license. Charles says that he does not consider Las Vegas his place of residence since he is never there. "I live on a boat but visit my house once in a while to dust," is what he tells people.

The ship provides accommodations, but Charles pays extra for meals and incidentals.

My findings ...
The good news is that Charles is doing it right regarding the independent performers he hires. His payments to them are business deductions and all he must do is keep a record of payment. No 1099 is required. This is because the work is being performed outside the US.

The bad news is that someone in Charles' working situation does not get a business travel deduction for meals and incidentals. The IRS gives a deduction for expenses incurred while away from home, such as the per diem for meals and incidentals, to alleviate the burden on someone whose business needs require him to maintain two homes. "Home" in this circumstance refers to the principal place of work, not the personal residence. The exception for this circumstance is when the work is "temporary."

And then there's even more bad news. A US citizen may exclude up to $82,400 income earned in a foreign country or countries if he is a bona fide resident of another country or countries. [Read more about foreign earned income here.]The cruise ship travels to many countries and through international waters. Charles resides on the ship. The Bahamanian ship is not considered a residence in the Bahamas. Charles is an itinerant and so gets no foreign earned income exclusion.