Background
Wages paid to agricultural employees in the form of commodities are not subject to FICA, FWHT or FUTA.
Salaries paid to spouses in commodities reduce Schedule F income and self-employment tax by allocating income away from Schedule F.
In addition, wages paid to a spouse can create earned income and qualify the taxpayers for the earned income credit, and important employee fringe benefits.
The Statute and Other Authority
FICA. Taxable FICA wages for agricultural labor does not include remuneration paid in any medium other than cash.
FUTA. Similarly, remuneration for agricultural labor paid in any medium other than cash is exempt from FUTA.
Treatment of Noncash Wages
Noncash agricultural labor is exempt from federal withholding tax.
Supporting Authority
A South Dakota grain and dairy corporation was not required to withhold or pay FICA on compensation to three employees, where their compensation was defined as 3 ½% of milk production, 15% of grain production, and one-third of all black calves produced from Holstein heifers bred to Angus bulls.
According to the regulations, FICA wages do not include remuneration in any medium other than cash for agricultural labor. This excludes payments made in any other medium, such as lodging, food, clothing, car tokens, transportation passes or tickets, farm products, or other goods or commodities.
Grain Compensation Ruling
A farm corporation compensated its two shareholders partially in cash and partially in grain. The grain was properly valued at the time of transfer, reported in the Form W-2 to the employee, and held by the employee for periods ranging from 6 to 10 weeks before sale.
The IRS National Office ruled that these transfers were subject to FICA for the following reasons:
- The arrangement lacked a business purpose; a noncash medium of compensation was used primarily to avoid payroll taxes.
- The employees did not bear the costs of ownership because the employer provided free storage in its grain bins after transfer and before sale.
- The employee grain was commingled with employer grain, and thus lacked identification.
- The interest at the time of transfer was to convert the grain into cash.
Implementation Procedures for Payment of Wages in Commodities
To utilize payment of compensation with raised commodities, the labor must be performed in an agricultural operation. The transfer to the employee and the sale must be two distinct and separate transactions:
- First: The employer transfers the commodity to the employee in payment for services. This establishes the value of the compensation for Form W-2 reporting. Documentation of title to the commodity should be obtained on the date of transfer to the employee. Examples of such evidence would include a grain scale ticket, or elevator storage receipt, or delivery receipt in the employee’s name.
- Second: The employee sells the commodity under the employee’s sole direction and control. This second step should be separated by the time from the employer’s transfer, to strengthen the evidence that the employee had control of the commodity prior to sale. Because some commodities, such as livestock and dairy products, do not lend themselves to a time lag between employer transfer and employee sale, it is preferable to use grain for commodity wages where possible.
Per the newly issued commodity guidelines, the employee needs to pay any costs associated with storage, feeding and shipping of the commodity after taking possession. These costs are then deductible as Miscellaneous Itemized Deductions on the employee’s Schedule A.
The amount of compensation to the employee must be reasonable in relation to the services rendered.
Recommendations for Documentation of Payments in Commodities
All employees paid in commodities should be covered by an employment contract. The employment contract should:
- Specify employee status;
- Define quantity or percentage of commodity to be transferred as compensation;
- State that the employee has complete control and risk of loss with respect to marketing/sale of the commodity after transfer of the commodity from employer;
- State that the employee provides labor only; all farm expenses should continue to be the responsibility of employer (if not, there is a risk of self-employed or partner status for employee); and
- Recite any fringe benefits, which are also being provided to the employee.
Reporting Requirements. Employers are required to issue a Form W-2 statement to employees whether paid in cash or commodities under Section 6051. Failure to file Form W-2 subjects the employer to penalties under Sections 6721 and 6722.
The amount of compensation is the market value of the commodity at date of transfer of the commodity from the employer to the employee. This amount normally will differ from the value of the commodity on the date sold.
Schedule D Reporting by Employee. In most circumstances, an employee will incur a gain or loss on the commodity wages. The gain or loss is equal to the difference between the selling price of the commodity and the employee’s basis (with the basis equal to the value reported as W-2 income to the employee on date of employer transfer). The gain or loss is reported on Schedule D as a short-term or long-term capital transaction, determined by the number of days the commodity was held.
Schedule F Reporting by Employer. Agricultural employers must report income from the transfer of zero basis appreciated property issued in exchange for services. This should be reported as Other Income on Schedule F [TAM 9202003, with reference to Section 1001, and Rev. Rul. 69-181, 1969-1 CB 196]. The employer also claims a corresponding deduction for labor hired on Schedule F [Sec. 83(h)]. [ << Previous ] [ Next >> ]
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