Posted by Tiffany Gaskin

Tax Guide For Agricultural Employers

Tax Guide For Agricultural Employers

This publication is intended for employers of farmworkers (agricultural workers). It contains information you may need to comply with farm labor (farm work) laws regarding Social Security and Medicare taxes, FUTA tax, and Federal income tax (labor taxes). Farmers report Social Security and Medicare taxes and federal withholding tax on Form 943 and report FUTA tax on Form 940. References to "income tax" in this guide apply only to "federal" income tax. 

When you pay employees, you don't pay them all the money they have earned. As an employer, you have the additional responsibility of withholding payroll taxes. Federal income tax and Social Security contributions and Medicare taxes withheld by employees are part of the wages you pay to the US Treasury instead of your employees. Your employees trust you to pay withholding taxes to the US Treasury through federal tax filings. This is why these withholding taxes are called trust fund taxes. If federal income, Social Security, or Medicare taxes to be withheld are not withheld, deposited, or paid to the United States Treasury, recovery from the trust fund may apply.


Who are the employees?

Employees are generally defined by law or the common statutes for certain situations. 

Usually, a worker is your employee if you have the right to control what will be done and how it will be done. It also happens when you give the employee freedom of action. What matters is that you have the right to check the details of how the services are provided. 

If there is an employer-employee relationship, whatever the name is. The employee can be called an independent or an agent. It doesn't matter how the payments are measured or paid, what they are called, or whether the employee is working full-time or part-time.

You are accountable for withholding and paying employee payroll taxes. It is also necessary to file the income tax return. These requirements do not apply to amounts paid to independent contractors. The rules discussed in this article only apply to workers who are your employees.


In general, you are an employer of agricultural workers if your employees:

• Grow or harvest agricultural or horticultural products on your farm (including animal breeding and feeding);

  • Handle, process, or package any raw agricultural or horticultural product, if it produces more than half of the product (for a group of 20 unregistered operators at most, all of the commodity); or

  • Provide services related to the salvage of wood or the clearing of shrubs and other hurricane debris (also called hurricane labor) if most of these services are performed on a farm;

  • Work in the conversation, management, maintenance, or improvement of your farm and its tools and equipment, if most of these services are performed on a farm;

  • Works for you in the ginning of cotton, turpentine, rubber resin products, or in operation and maintenance of irrigation systems.

For this purpose, the term "farm" includes cattle, dairy products, poultry, fruit, truck animals, and poultry farms, as well as plantations, farms, nurseries, fields, greenhouses, or other similar structures used primarily for the cultivation of agricultural products or vegetables and orchards.

The agricultural activity does not include resale activities that do not involve substantial agricultural or horticultural products, such as a retail store or greenhouse used primarily for display or storage. It also does not include processing services that change a product from its raw or natural state, nor services provided after a product has changed from its raw or natural state.


A business owned and managed by spouses.

If you and your spouse own and operate a farm or non-farm business together and share the profits and losses, you can be partners in a partnership, whether or not you have a formal partnership agreement. The company is considered to be the employer of any employee and is liable for social charges because of the salaries paid to its employees.


Exception: qualified joint venture

For tax years after 2006, the Small Business and work opportunity tax Act 2007 (Public Law 110-28) provides for a "qualifying joint venture," whose only members are the spouses who file a tax return joint income considered a partnership for federal tax purposes. An eligible joint venture conducts a business or trade in which:

  • The only members of the joint venture are the spouses who file a joint tax return,

  • Both spouses participate materially 

  • Both spouses choose not to be treated as partners

  • The company is jointly owned by both spouses and is not in the name of a state legal entity, such as a limited partnership or limited liability company (LLC).

In order to make a choice, all the elements of income, profit, loss, deduction, and credit must be distributed between the spouses, according to the interest of each spouse in the business, and declared in Schedule C (Form 1040) or Schedule F (Form 1040) as a sole proprietorship. Each spouse must also submit a separate Schedule SE Form (Form 1040) to pay their taxes, if applicable.

Spouses who use the qualifying joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. If the qualifying joint venture is subject to a payroll tax, either spouse may declare and pay payroll tax due to salaries paid to employees who use the EIN spouse's exclusive property. 

In general, registering as a qualifying joint venture will not increase the total amount of tax payable by the spouses on the joint tax return. However, give each spouse credit for the Social Security earnings upon which pension benefits and Medicare coverage are based, without completing a partnership declaration form.


Wages and other salaries

The cash wages you pay employees for farm work are usually subject to Social Security and Medicare taxes. You may also need to withhold, record, and report additional Medicare taxes. While wages are subject to Social Security and Medicare taxes, they are also subject to federal income tax withholding. You are responsible for paying these taxes to the federal government if you receive them from your employees. If, for instance, you withhold less than the correct tax from an employee's salary, you are still responsible for the full amount. You may also be liable for FUTA charges, which are not withheld by you or paid by the employee. Cash wages include checks, payment orders, and all types of cash.


Non-cash wages (including commodity wages)

Non-cash wages include food, accommodation, clothing, travel permits, agricultural products, or other property or merchandise. Noncash wages paid to agricultural workers, including commodity wages, are not subject to Social Security taxes, Medicare taxes, or federal withholding tax. However, you and your worker can agree to withhold federal income tax on non-cash wages.

Non-cash wages, including commodity wages, are handled as cash wages if the transaction's essence is cash payment. Noncash wages handled as cash wages are subject to Medicare taxes, Social Security taxes, and federal income withholding tax.

Report the value of noncash earnings in box 1 of Form W-2 along with cash wages. Non-cash wages for agricultural work are subject to federal income tax unless a specific exclusion applies. Do not report non-cash wages in box 3 or 5 of Form W-2 (unless the transaction's essence is cash payment and is treated as cash wages).


Social security and health insurance taxes

In general, you must withhold Social Security and Medicare taxes from all cash payments you make to employees. You may also need to withhold additional Medicare taxes. 


The $ 150 test or the $ 2,500 test

All cash wages paid to an employee during the year for agricultural work are subject to Medicare taxes, Social Security, and federal income tax withholding if any of the following two criteria are satisfied:

  • Pay an employee a cash wage of $150 or more per year for farm work (including all cash wages paid on time, part-time, or otherwise). The $ 150 test applies individually to each farmworker you hire. If you employ an active family, each member is treated separately. 

  • The total amount you pay for farmwork (cash or not) for all your employees is $ 2,500 or more per year.


Exceptions

The annual cash salary of less than $150 that you pay a seasonal farmworker is not subject to Medicare taxes and Social Security or federal income tax withholding, even if you pay $ 2,500 or more to all farmworkers. However, these wages are based on the $ 2,500 test to determine whether other workers' wages are subjected to Social Security and Medicare taxes.

A seasonal agricultural worker is someone who:

  • Receive piece-rate work in an operation generally paid in several installments in the region of employment,

  • Work in agriculture as hand-harvest labor,

  • You have worked in agriculture for less than 13 weeks in the previous calendar year.

  • You move daily from your permanent home to the farm. 


Withholding of social security and health insurance

The Social Security tax rate is 6.2% for both employee and employer for the first $ 142,800 paid to an individual employee in 2021. You must deduct this tax from each employee and pay an equivalent amount. Qualified wages for medical leave and qualified wages for family leave are not subject to the employer's contribution to social security tax; therefore, the tax rate on these salaries is 6.2%. The Medicare tax rate is 1.45% for both employees and employers at all salaries. You must deduct these costs from each employee and pay an equivalent amount. 

Social Security and Medicare taxes apply to most health benefits, including payments made by third parties, such as insurance companies.


FOR MORE INFORMATION OR TO SEE HOW TIFFANY GASKIN CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING. 

Tiffany Gaskin
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