Farmers often pay their children for doing various jobs on the farm. Properly done, these payments can provide tax savings to the parents.
Wages paid to the child as an employee of the business are a deductible business expense, if certain requirements are met. In addition, if the child is younger than 18, the parents do not have to withhold the Social Security and Medicare taxes on the amount paid.
The child will have to pay income tax on the amount of wages received that exceed their standard deduction, and in most situations the child’s tax bracket will be lower than the parents’ bracket, thus resulting in less total tax paid.
The child must be a legitimate employee and must perform duties that are within the ordinary course of the business operations. These jobs may include feeding livestock, repairing fences, cleaning grain bins, performing fieldwork, running errands, or any other chore related to the business.
However, payments made to the child for doing jobs that are not related to the business are not deductible as a farm business expense. In addition the jobs should be age appropriate. If audited, it may be difficult to prove that payments to an extremely young child are a legitimate business expense.
KEEP DETAILED RECORDS
It is also important to keep a detailed record of the hours and various tasks that the child performs for the business. The wages paid should be reasonable, based upon the child’s age and the work performed.
A reasonable wage is not defined by tax law. It is based upon several factors of employment, including, but not limited to, qualifications, training, responsibilities, difficulty of the duties performed, and work actually performed.
The same legal and income tax reporting requirements must be followed when hiring a child as when hiring any other employee. An IRS Form W-4, Employee’s Withholding Allowance, must be completed, and Form W-2, Wage and Tax Statement, should be filed to report the wages paid to the child.
It is also important for the parent to obtain an Employer Identification Number (EIN) for the business. These forms insure that the relationship between the parent’s business and the child is a true employment relationship.
It is also advisable to have a written employment agreement that specifies the child’s duties and responsibilities, even though this is not legally required. Do not pay the child with cash, but use a check and deposit the money into the child’s bank account to prove that payment was made.
This is only a brief discussion of the tax rules that apply to farm and ranch operators who employ their children. For additional and current information about the rules and withholding rates, obtain a copy IRS Publication 51, (Circular A) Agricultural Employer’s Tax Guide, which is available at the IRS website http://irs.gov .
In addition, be sure to consult your tax preparer or advisor for additional information about employment taxes and completing the required forms before employing your children, as well as other traditional employees.
(J.C. Hobbs is Assistant Extension Specialist-Tax Education and Farm Management, Oklahoma State University at Enid. Dr. Wayne Hayenga is Professor Emeritus and Extension Specialist at Texas A&M University, College Station, and also has a law degree.)