The Tax Relief Act passed last week provided for a 2% reduction in the employee's portion of the FICA tax. This dropped the tax rate from 6.2% to 4.2% for 2011 only. For individuals making more than $20,000 in salary or net farm income, this is an actual net tax decrease.
However, for farm hands making less than $20,000 for the year, this is actually a net tax increase. Let me explain. This reduction in payroll taxes replaces the Making Work Pay credit which was equal to the amount of FICA tax an individual would pay up to a maximum of $400 for singles and $800 for married filing joint couples.
Therefore, if a farm hand was single and received wages of $6,452, under the old law, they would have received the maximum credit of $400. Under the new law, with these same wages, the farm hand would only get a tax savings of $129 or net cost to the farm hand of $271. It is not until the wages reach $20,000 that the farm hand would break even.
Although the Tax Relief Act of 2010 had many tax goodies for farmers, it does appear to hit lower income employees in some cases. However, the extension of the higher earned income tax credit procedures and other related individual provisions should more than offset this possible tax increase.