Publication 595
Tax Highlights for Commercial Fishermen

For use in preparing 2002 Returns

Form 1099-MISC

Give Form 1099-MISC to each person to whom you have paid the following during the year. This form can be filed electronically if the recipient consents.

1. A share of your catch (or a share of the proceeds from the sale of your catch) to an individual who is not your employee (self-employed). For information about individuals considered to be self-employed, see Which fishermen are considered self-employed, later.
2. At least $600 in rents, services, and other income payments to an individual who is not your employee (self-employed).
3. Cash payments of at least $600 to a commercial fisherman for the purchase of fish for resale. See the instructions for Form 1099-MISC for definitions of cash and fish and for information about the recordkeeping requirements for resale buyers.
4. Cash payments of up to $100 per trip that are:
   1. Dependent on a minimum catch,
   2. Paid solely for additional duties for which additional cash payments are traditional in the fishing industry, and
   3. Not otherwise reportable as wages.

Which fishermen are considered self-employed?   Certain fishermen who work on a fishing boat are considered to be self-employed for purposes of employment and self-employment taxes. A fisherman is considered self-employed if he meets all of the following conditions.

1. He receives a share of the catch or a share of the proceeds from the sale of the catch.
2. His share depends on the amount of the catch.
3. He receives his share from a boat (or from each boat in the case of a fishing operation involving more than one boat) with an operating crew normally made up of fewer than 10 individuals. This requirement is considered to be met if the average number of crew members on trips the boat made during the last 4 calendar quarters was less than 10.
4. He does not get any money for his work (other than his share of the catch or of the proceeds from the sale of the catch), unless the pay meets all of the following conditions.
   1. He does not get more than $100 per trip.
   2. He is paid only if there is a minimum catch.
   3. He is paid solely for additional duties (such as for services performed as mate, engineer, or cook) for which additional cash payments are traditional in the fishing industry.

Example 1.   You hire a captain, a mate, an engineer, a cook, and five other crew members to work on your fishing boat. The proceeds from the sale of the catch offset boat operating expenses such as bait, ice, and fuel. You divide 60% of the balance among the captain, the mate, and the crew members. You divide the other 40% between yourself and the captain. The mate, engineer, and cook also each receive an extra $100 for each trip that brings back a certain minimum catch. The crew members do not receive any additional pay between voyages, but they must do certain work, such as repairing nets, splicing cable, and transporting the catch.

For purposes of employment and self-employment taxes, each crew member (including the captain, mate, engineer, and cook) is considered self-employed. You must file Form 1099-MISC to report amounts you pay to them.

Example 2.   The facts are the same as in Example 1 except that all the crew members but the captain receive an extra $100 for each trip that brings back a certain minimum catch.

For purposes of employment and self-employment taxes, the captain, mate, engineer, and cook are self-employed individuals. The other five crew members who receive this extra payment in addition to the proceeds from the sale of the catch are employees. They are employees because the $100 payment is not paid solely for additional duties for which additional cash pay is traditional in the fishing industry.

Employment Tax Forms

You are generally required to withhold federal income tax, social security tax, and Medicare tax from your employee's wages. You also must pay the employer's share of social security and Medicare taxes. In addition, you may be required to pay federal unemployment tax under the Federal Unemployment Tax Act (FUTA). If you have employees, you will need to file forms to report these employment taxes. For more information, see Publication 15, which explains your payroll tax responsibilities as an employer.

To help you determine whether the people working for you are your employees, see Publication 15-A. It has information to help you determine whether an individual is an independent contractor or an employee.

If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Individuals you employ to work on a boat that normally has an operating crew of fewer than 10 individuals may be considered self-employed. For more information, see Which fishermen are considered self-employed? under Form 1099-MISC, earlier.

Table 1.   See Table 1, shown earlier, for information on the employment tax treatment of fishing activities and certain fishermen.

When Do Fishermen Pay Estimated Tax and File Tax Returns?

Figure 1. Estimated Tax for Fishermen

When you must pay estimated tax and file your tax return depends on what percentage of your gross income comes from fishing. See Figure 1 to determine if you have to pay estimated tax. Gross income is discussed later.

General Rule for Making Estimated Tax Payments

You must make estimated tax payments for 2002 if you expect to owe at least $1,000 in tax, after subtracting your withholding and credits, and you expect your withholding and credits to be less than the smaller of the following.

1. 90% of the tax to be shown on your 2002 tax return.
2. 100% of the tax shown on your 2001 tax return. Your 2001 tax return must cover all 12 months for this rule to apply.

If at least two-thirds of your gross income for 2001 or 2002 is from fishing, substitute 662/3% for 90% in (1) above.

If you receive at least two-thirds of your total gross income from fishing in the current or prior year, special estimated tax and return due dates apply to you. See the discussion under Due Dates for Qualified Fishermen, later.

What Is Gross Income?

Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. Gross income is not the same as total income shown on line 22 of Form 1040. On a joint return, you must add your spouse's gross income to your gross income. To decide whether two-thirds of your gross income for 2002 was from fishing, use as your gross income the total amount of the following income (not loss) items from your tax return.

• Wages, salaries, tips, etc., from Form 1040, line 7.
• Taxable interest from Form 1040, line 8a.
• Ordinary dividends from Form 1040,
  line 9.
• Taxable refunds of state and local taxes from Form 1040, line 10.
• Alimony from Form 1040, line 11.
• Gross business income from Schedule C (Form 1040), line 7 (includes gross fishing income).
• Gross business receipts from Schedule C-EZ (Form 1040), line 1 (includes gross fishing income).
• Capital gains from Form 1040, line 13, including gains from Schedule D (Form 1040). Losses are not netted against gains.
• Gains on sales of business property from Form 1040, line 14.
• Taxable IRA distributions, pensions, annuities, and social security benefits.
• Gross rental income from Schedule E (Form 1040), line 3.
• Gross royalty income from Schedule E (Form 1040), line 4.
• Taxable net income from an estate or trust reported on Schedule E (Form 1040), line 36.
• Income from a REMIC reported on Schedule E (Form 1040), line 38.
• Gross farm rental income from Form 4835, line 7 (includes fishing income from Schedule E (Form 1040)).
• Gross farm income from Schedule F (Form 1040), line 11.
• Your distributive share of gross income from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065).
• Your pro rata share of gross income from an S corporation from Schedule K-1 (Form 1120S).
• Unemployment compensation from Form 1040, line 19.
• Other income reported on Form 1040, line 21, not included with any of the items listed above.

Percentage From Fishing

Figure your gross income from all sources. Then figure your gross income from fishing. Divide your fishing gross income by your total gross income to determine the percentage of gross income from fishing.

Example 1.   James Smith had the following gross income and fishing income in 2002.

Schedule D showed gain from the sale of a rental house carried over from Form 4797 ($5,000) in addition to a loss from the sale of corporate stock ($2,000). However, that loss is not netted against the gain to figure Mr. Smith's total gross income or his gross fishing income. His gross fishing income is 60% of his total gross income ($75,000 ÷ $125,000 = .60). Therefore, based on his 2002 income, he does not qualify to use the special estimated tax payment and return due dates for 2002, discussed next. However, he would qualify if at least two-thirds of his 2001 gross income was from fishing.

Example 2.   Assume the same facts as in Example 1 except that Mr. Smith received only $21,500, instead of $41,500, rental income. This made his total gross income $105,000. He qualifies to use the special estimated tax payment and return due dates, discussed next, because 71.4% (at least two-thirds) of his gross income is from fishing ($75,000 ÷ $105,000 = .714).

Due Dates for
Qualified Fishermen

If at least two-thirds of your gross income for 2001 or 2002 was from fishing, you are a qualified fisherman and can choose either of the following options for your 2002 tax.

• Make your required annual payment, discussed next, by January 15, 2003, and file your Form 1040 by April 15, 2003.
• File Form 1040 by March 3, 2003, and pay all the tax due. You are not required to make the annual payment. If you pay all the tax due, you will not be penalized for failure to pay estimated tax.

Required annual payment.   If at least two-thirds of your gross income for 2001 or 2002 was from fishing, only one estimated tax payment is due. The required annual payment is the smaller of the following amounts.

• 662/3% (.6667) of your total tax for 2002.
• 100% of the total tax shown on your 2001 return. (The return must cover all 12 months.)

2003 tax. If at least two-thirds of your gross income for 2002 or 2003 is from fishing, you can choose either of the following options for 2003.

• Make your required annual payment by January 15, 2004, and file your Form 1040 by April 15, 2004.
• File Form 1040 by March 1, 2004, and pay all the tax due.

Fiscal year fishermen.   If you qualify to use these special rules but your tax year does not start on January 1, you can file your return and pay the tax by the first day of the 3rd month after the close of your tax year. Or you can make your required annual payment within 15 days after the end of your tax year. Then file your return and pay any balance due by the 15th day of the 4th month after the end of your tax year.

Due Dates for
Nonqualified Fishermen

If less than two-thirds of your gross income for 2001 and 2002 was from fishing, you cannot use these special estimated tax payment and return due dates for your 2002 tax year. Instead, you should have made quarterly estimated tax payments on April 15, June 17, and September 16, 2002, and on January 15, 2003. You must file your return by April 15, 2003.

If less than two-thirds of your gross income for 2002 and 2003 is from fishing, you cannot use these special estimated tax payment and return due dates for your 2003 tax year. You generally must make quarterly estimated tax payments on April 15, June 16, and September 15, 2003, and on January 15, 2004. You must file your return by April 15, 2004.

For more information on estimated taxes, see Publication 505.

Estimated Tax Penalty
for 2002

If you did not pay all your required estimated tax for 2002 by January 15, 2003, or file your 2002 return and pay the tax by March 3, 2003, you should use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if you owe a penalty. If you owe a penalty but do not file Form 2210-F with your return and pay the penalty, you will get a notice from the IRS. You should pay the penalty as instructed by the notice.

If you file your return by April 15 and pay the bill within 21 calendar days (10 business days if the bill is $100,000 or more) after the notice date, the IRS will not charge you interest on the penalty.

Do not ignore a penalty notice, even if you think it is in error. You may get a penalty notice even though you filed your return on time, attached Form 2210-F, and met the gross income from fishing test. If you receive a penalty notice for underpaying estimated tax that you think is in error, write to the address on the notice and explain why you think the notice is in error. Include a computation, similar to the one in Example 1 (under Percentage From Fishing, earlier), showing that you met the gross income from fishing test.

Other Filing Information
for 2002

Payment date on holiday or weekend.   If the last day for filing your return or making a payment falls on a Saturday, Sunday, or legal holiday, your return or payment will be on time if it is filed or made on the next business day. The actual filing and payment due dates provided in this publication generally reflect this adjustment for Saturdays, Sundays, and legal holidays.

Extension of time to file Form 1040.   If you choose not to file your 2002 return by March 3, 2003, the due date for your return will be April 15, 2003. However, you generally can get an automatic 4-month extension of time to file your return. Your Form 1040 would then be due by August 15, 2003.

You can get this extension by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, by April 15, 2003. You also can get an extension by using IRS e-file. Form 4868 does not extend the time for paying taxes. For more information, see the instructions for Form 4868.

This extension does not extend the March 3, 2003, due date for qualified fishermen who did not make the required annual payment and want to avoid an estimated tax penalty. Therefore, if you did not make your required annual payment by January 15, 2003, and you file your tax return after March 3, 2003, you will be subject to a penalty for underpaying your estimated tax, even if you get an extension of time to file Form 1040.

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