Ag Conversations


How farmers and ranchers can legally save on payroll taxes

Oct 21, 2019

If you are a farmer or rancher looking to cut your payroll taxes, paying your employees in goods or hiring your children may help you save money.

You should always consult your tax professional to ensure that you are in compliance, but let’s take a look at what is required.

Paying in goods versus cash

Wages paid in the form of crops or livestock rather than in cash may not be subject to FICA for either the employer or the employee if done right.  A few key points are as follows:

  • Employee should bear risk:Hauling grain to the elevator and instructing them to cut a check for $5,000 to your employee and the balance to you as the employer doesn’t meet the “smell” test for wages to not be disguised cash wages.Commodities should be transferred to the employee in a form where the employee bears risk.Risks could be in the form of market fluctuations, death or disease depending on the commodity, etc.
  • Documentation is key:Like most things, a paper-trail made at the time of the transaction is going to be your best support in an audit.Because it doesn’t go through a checkbook, it is very easy to miss documenting in-kind wages.Be sure to note the market price on the date the commodity is transferred to the employee, quantity and kind of commodity, and the date the transaction is made.
  • Payroll Reports must be filed:Just because commodity wages are not subject to payroll taxes doesn’t relieve you of the need to report them.Year-end W-2s and Forms 943 must be filed.

Hiring your children

Another way to pay wages not subject to payroll taxes is to hire your children.  Children under age 18 may be hired by their parents and paid cash wages are not subject to FICA taxes.  Payroll reports still need to be filed and wages reported on a W-2.  It is important to note this typically is not an option for parents’ C-Corporations to hire their children but is available for sole-proprietors and partnerships.

However, there are some very good reasons to pay into the Social Security system:

  • For employees with modest incomes, wages subject to FICA could make them eligible for an earned income tax credit.
  • For many taxpayers, businesses wages subject to FICA could increase their section 199A deduction.
  • Not paying payroll taxes reduces social security retirement benefits for the employee and it also could make them ineligible for disability benefits should they become disabled.

Regardless of how you compensate your employees it is important to strike a balance of meeting their needs and balancing the strain on your operation.  Please make sure you are consulting your tax advisor to make sure your strategy can meet your overall goals while being in compliance.

For more information, please contact one of our ag industry professionals today.

Interested in learning more? Read these previous blog posts:

Farm tax deductions and other changes: 2018 tax season observations

The tax incentives available to producers who export


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