One of the great options open to farmers is to pay their employees in-kind wages. In-kind wages are the payments of the crops that a farmer grows. For example, a farmer could pay their employees either cash wages of $10,000 or 1,000 bushels of soybeans worth $10,000. The reason that a farmer would want to do this is that in-kind wages are not subject to self-employment taxes. On $50,000 of these types of wages, the savings to the farmer and employee would total about $7,500.
Generally, we suggest using these types of wages where the farmer has a C corporation set up to do the farming operation and it will pay some of the farmer’s wages in-kind. The structure of these wages is very important since if the IRS determines these are a cash equivalent, then the wages are subject to payroll taxes.
Wages paid in-kind are crops that are transferred from the employer and put into the name of the employee. The employee then has the risk and reward due to the fluctuations in the value of the crop. For example, the employer may transfer 1,000 bushels of beans to the employee at $10 per bushel or a total in-kind wage of $10,000. This amount is reported to the IRS on the employee’s W-2. After receiving the 1,000 bushel of beans, the employee will determine when and if they want to sell the beans. If the beans go up in value by 50 cents a bushel, the employee will report a short-term capital gain of $500 (if held more than a year, then it is long-term). Conversely, if the beans drop in value by 50 cents, they will report a short-term capital loss of $500.
The highlights of what is required to qualify is as follows:
Again, these wages normally work best between a corporation owned by the farmer and the farmer as employee. You still should make sure to pay enough cash wages to provide four full quarters of credit for social security purposes.
This is a complicated part of farm employment and make sure to review this with appropirate legal and tax advisors to enjoy the benefit.