In small family farm operations it is common for spouses to provide a variety services such as bookkeeping, payroll, providing meals for workers, feeding livestock, moving workers from field to field, and even taking grain to the elevator. If your spouse does any of these and more for the family farm, it may be tax advantageous for your to pay them a fair wage. These wages can either be paid as cash wages or commodities.
Cash wages are subject to Social Security and Medicare taxes in addition to any federal and state withholdings. Commodities are not subject to Social Security or Medicare taxes and are also not subject to the federal income tax withholding rules.
If you feel commodity wages are the route you wish to take, you must make sure the following:
- payment is for agricultural labor
- the employee exercises control of the commodity,
- the payment is not equivalent to cash
- the employer puts the fair market value of the commodity (at the time of transfer) in box 1 of the W-2. If there is any gain or loss when it comes time for the employee to sell the commodity, they will record the gain or loss as a short-term gain or loss on Schedule D of their tax return.
If you feel that cash wages are the way to go, know they can be used to calculate the Domestic Production Activities Deduction.
Farmers who are subject to self-employment tax have the ability to deduct their health insurance before Adjusted Gross Income is calculated. While this is a great deduction, it does not help the farmer save on any of their self-employment tax liability. If the farmer employs his or her spouse, they have the ability to pay family coverage in the spouses name and deduct it through the business. Be careful as this will be disallowed if the spouse works for another employer that provides subsidized health insurance.
Talk to your farm tax advisor to see which option is most tax advantageous for you.
By Ella Herr, Staff Accountant