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In-Kind Wages Can Be Better Than Cash

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May 26th, 2009

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:

  • Did your employees perform agricultural related work?
  • Did you pay the employees in commodities raised and harvested on your farm?
  • Did you pay them a partial cash wage?
  • Did you have an employment contract with the following:
    • Was it written
    • Was the employee’s duties defined as Agricultural labor
    • Did it state the employee would be paid a commodity wage
    • Did it state the type of commodity
    • Did it state the quantity of the commodity
    • Was it signed by both the employer and employee
    • Was it notorized on the date of the agreement
  • Did the employer remove the lein, if any, on the commodity paid to the employee?
  • Was the grain in open storage and not a warehouse receipt?
  • Was the grain readily marketable and not contracted for sale?
  • Did the employer notify the warehouse to transfer the commodity to the employee?
  • Do you have bill of sale for the transfer
  • Will the employee be responsible for the following:
    • Assuming the risk of loss due to price fluctuations, damage, death, etc.
    • Assuming the costs of owning and maintaining the commodity
    • Holding the commodity long enough to prove ownership and control
    • Marketing the commodities themselves

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.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

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5 Comments

  • March 21, 2011 at 5:44 am

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    Thanks a lot for being our mentor on this topic. I genuinely enjoyed your current report very

  • May 17, 2011 at 7:16 am

    Colin P. O'Shea

    What is tax consequences to the employer?
    Are the commodity wages deductible if the commodity was never “sold”? ( stored in bins and delivered to the elevator in the name of the employee). In this case seems like it should be not deductible as the input costs have already been deducted without realizing any income on the sale. Could you please respond to this question via my e-mail.

  • May 17, 2011 at 1:15 pm

    Paul Neiffer

    The wages are deductible when the grain is transferred to the employee. The employee can hold it as long as they want to and it does not affect the corporation at all.

  • March 14, 2012 at 7:36 am

    Lynn Hettinger

    If the employer/employee have a signed contract at the beginning of the year that states clearly the commodity wage, can the employee go ahead and make a forward contract for a fall delivery with a local elevator or do they need to wait to “commit” it until after they have officially received the grain?

  • December 22, 2012 at 8:27 am

    Wendy Guthmiller

    How does grain wages affect the APH for crop insurance?

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