Missouri Dairy Business Update  
Volume 5, Number 5
May 2005

Farm Labor Tax


Many farmers only hire part-time employees or hire help for special projects. Keeping current on the labor tax regulations can be especially difficult for these farmers. As a general rule, Social Security and Medicare must be withheld and matched on wages paid to employees of your business. Additionally, wages subject to Social Security and Medicare taxes are also subject to income tax withholding. Here are some of the basic rules for farm labor taxes.

The $150 or the $2,500 Test:
Wages paid during the year for farm work are subject to Social Security and Medicare taxes and income tax withholding if either of the following two tests is met:

  • You pay wages to an employee totaling $150 or more for the year for farm work, or

  • The total wages (cash and noncash) paid during the year for farm work to all your employees is $2,500 or more.

Wages Paid-in-Kind:
Commodity wages are not considered cash wages and are therefore not subject to social security and Medicare taxes or income tax withholding. Several i's must be dotted and t's crossed in order to insure commodity wages are not reclassified by the IRS as cash wages. Work with a tax specialist if you desire to utilize commodity wages into your employees' compensation package.

Employment of Family Members:
Wages paid to your children under age 18 are exempt from income tax withholding, Social Security and Medicare taxes. If your child becomes 18 during the year, wages paid following that date are not exempt. Wages paid to your children are included in calculating the $150 or the $2,500 test.

Compensation paid to your parents are exempt from income tax withholding, Social Security and Medicare taxes, if the work:

  • is for domestic services in or about the private home of the son or daughter,
    or
  • is performed outside of the sonís or daughterís trade or business.

Payment of Labor Taxes:
Labor taxes need to be deposited monthly or semiweekly. If your total labor tax for 2003 (the lookback period for 2005) was less than $50,000 - you should deposit your labor taxes monthly. However, if you are sure your 2005 labor taxes will be less than $2,500 - you are not required to make deposits and can send your total labor tax payment with Form 943 "Employer's Annual Tax Return for Agricultural Employees".

As an agricultural employer, you need to have a basic understanding of the labor tax regulations. Withholding labor taxes correct is the best policy for you and your employees. Explaining the reason for corrective withholdings later in the year can be embarrassing for you and might create financial concerns for your employees.

Source: IRS Circular A, "Agricultural Employer's Tax Guide"
This publication is available online at:
http://www.irs.ustreas.gov/pub/irs-pdf/p51.pdf

For more on farm labor issues see: http://agebb.missouri.edu/dairy/labor/index.htm


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