Many of our clients operate their farm operation as either an S or C corporation and in many cases the only employee of the corporation is the farmer and perhaps their spouse and children. Many of these farmers do not report any wages to them until the fourth quarter of the year. In these cases, the wages reported in this quarter can easily exceed $20,000.
What many farmers do not realize is if the wages reported for any quarter exceed $20,000, the corporation is now subject to paying Federal Unemployment taxes (FUTA) and in most cases state Unemployment taxes (SUTA). Although FUTA can be fairly minor (perhaps $42 per person), it can increase to around $400 per person if SUTA is no handled or paid correctly.
In many states, once you are subject to SUTA it can take a minimum of two years to get out of paying it since it requires you to be under the $20,000 quarterly threshold for the current year and the previous year. Also, these states usually require you to be in the highest rated pool and your tax rate can exceed 3.5% and you would owe SUTA on up to $35,000 in wages or more.
Let's look at an example, assume the farmer pays himself $50,000 per year in wages all in the fourth quarter. Let's assume his SUTA rate is 3.5% on the first $35,000 of wages. His SUTA liability would be $1,225. His normal FUTA liability would be 6% of $7,000 or $420, however, since he paid into the State, he is allowed a credit to reduce this liability down to $42 (some states do not get the maximum credit. We recapped that in a post about two weeks ago). Therefore, his total SUTA and FUTA liability for 2012 is $1,267.
Now, if the farmer has spread out his wages evenly over the four quarters, he would not owe any FUTA or SUTA. Also, the payment of commodity wages is exempt from FUTA and SUTA (although you need to check your state rules).
Every state seems to have different rules on the application of SUTA to shareholders of a corporation, but at a minimum if you keep your total wages under $20,000 per quarter, you can save some payroll taxes.