The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Pay Your Kids!
May 30, 2013
One of my favorite memories of my childhood is riding the combine with my dad every harvest season. A very early slides shows me sitting on my father's lap sound asleep on his 1950 era Massey Ferguson combine. This combine only lasted one harvest season since it was not a Hillside model. He upgraded to an International 151 and from thereon out, I was on that machine (and the subsequent 403 and 453) with my dad from morning to night. He must of had the patience of Job since I am sure I was a handful (according to my wife, things have not changed much).
Starting at about age 15 I became a full-time operator of the combine and although my parents "paid" me by putting me through college, buying a car, etc., they failed to do it properly for tax purposes. Instead of issuing a W2 to my brother and I for the work we performed, they simply paid for certain items and never ran it through the farm.
The correct way to do this is to issue a W2 to your children based upon an appropriate wage for the services they perform. These wages, although reported on form 943 and a W2, are not subject to any payroll taxes (assuming you are sole proprietor farmer) as long as the child is under age 18. The wages are also fully deductible by the farmer against their farm income and does reduce self-employment tax.
The child can earn about $6,000 and not have to file a federal return or pay tax (in some states, they may owe some state income tax). Another nice feature is that these wages qualify for contributions to a ROTH IRA and if they invest those funds until retirement it can grow to quite a nice nest egg. For example, assume the child earns $20,000 from age 15 to right before age 18. The farmer would save about $8,000 in income and self-employment taxes and the child would owe no income tax and if invested in a ROTH at 6% until age 68, this $20,000 would grow to about $320,000 of after-tax wealth. Not too bad of a return.
Remember, if you have kids under age 18 that help you on the farm, pay them.