The 20% QBI deduction has a possible limit based on the wages that the farmer pays its employees. However, this limit only applies if your taxable income is over the threshold (about $160k single and twice that for married couples).
Most farmers typically are under this threshold so they figure the wage limit does apply to them. However, if they sell to a cooperative, there is an reduction based on the LESSER of (a) 9% of cooperative related QBI, or (b) 50% of wages related to that same income.
Therefore, a farmer needs to know what wages count for QBI if they sell to a cooperative even if they are below the threshold. Let’s review the common types of farm wages to see if they qualify or not:
- Wages paid in cash - These wages qualify for QBI.
- Commodity wages - These wages do not qualify for QBI.
- Wages paid to children under age 18 - Although these are not subject to FICA and Medicare tax, they do qualify for QBI since these wages are subject to income tax withholding.
- H2A wages - These wages do not qualify for QBI. They are not subject to income tax withholding, therefore they do not qualify.
- Self-employed health insurance included as part of S corporation owner’s wages - These wages do qualify since they are technically subject to income tax withholding.
It is important to know what wages do or do not qualify since one or both of these limits/reductions apply to most farmers.
