Paying 4 Kids Equals $8,300 of Tax Savings
While growing up on the farm with my brother and sister, we worked in spring and fall planting plus doing the summer harvest. Most of the time, my parents never did pay a wage to either my brother or I, however, they did purchase a car for us and put us through college. This means that I think we probably earned at least what we were worth, however, from an income tax standpoint, they probably did not maximize their tax savings.
Currently, if you run your farming business as a sole proprietorship (which most farmers do) and have children that help you operate the farm such as my brother and I did, you should consider paying them a wage for this work. When you pay wages to your children for doing work, many good income tax savings happen:
- First, any wages that are paid to the children are deductible by you as the farmer.
- Second, if the wages paid to the child are less than the standard deduction (currently $5,700), the wages are completely tax free to the child.
- Third, the wages paid are not subject to FICA or other federal payroll taxes and are generally exempt for state payroll taxes.
- Fourth, the wages paid to the child qualify them for either a regular IRA or a Roth IRA. As we have stated here previously, the sooner you can put money into an IRA, the more money you will have at retirement age.
I plugged into my tax estimator software what the total savings would be using the following assumptions:
- Married farm couple living in Iowa with 4 children younger than 18,
- Net farm income of $106,000 before any payments to the children,
- The children each were entitled to wages of $5,700 for the year,
- The farmer took the standard deduction.
The total taxes owed for the year with out any children wages was about $28,320. This includes the federal tax of $5,949, the self-employment tax of $14,977 and the state of Iowa tax of $7,394. If total kid’s wages of $22,800 were paid during the year, then the total combined taxes would be $20,016, or a savings of $8,304. This is equal to federal tax savings of $$3,180, self-employment tax savings of $3,221 and state of Iowa tax savings of $1,903. The net percentage reduction in taxes is about 29%. This percentage savings would hold true if your farm income before children wages was in the range of about $50,000 up to maximum wage base ($106,800 for 2009). Once you go over the wage base amount, you self-employment tax savings drop from about 15% to about 3%. Below $50,000 of farm income with four kids, you are most likely not paying any income taxes and your federal tax savings would be minimal. However, if these wages would qualify you for the earned income tax credit, then you might be entitled to another $3,000 or so of tax relief.
Remember, the wages must be based upon actual work done and at a rate similar to rate charged for work done in a farm in your area. You should keep accurate records of the work performed and make sure that you follow all child labor laws for your state and region. Also, the savings may be less in a state where the wages paid to the child would make the income taxable for that state.
I believe that is by far one of the best income tax savings available to farmers with minor children and also helps provide for their college education.
You will need to make your own calculations regarding your savings.
If you wish, I would gladly run the numbers for your situation. All you would need to send me is the following information:
1. Estimated farm income before children’s wages
2. Estimated amount of wages to be paid
3. Total other income and deductions if you do not take the standard deduction
4. State that you live in
5. Total number of kids and their ages.
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 principal with CliftonLarsonAllen in Walla Walla, 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. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Thank you! We also sold some cattle in their name – do they report that on a schedule F? So far they don’t have any expenses. What’s the best way to do this? Thanks again!