Many farm operations are missing out on payroll tax saving strategies available to them and their employees.
Paying an employee grain wages, in lieu of cash wages, is one strategy that could save both the employer and employee 7.65 percent in payroll taxes. Cash wages are subject to Federal Insurance Contributions Act (FICA) taxes which consist of a 6.2 percent Social Security tax (on the first $128,700 for 2018) and a 1.45 percent Medicare tax, paid by both the employer and the employee. Grain wages are not subject to FICA taxes. However, grain wages are still subject to federal and state income tax, just like cash wages.
The employer will issue a W2 to the employee at the end of the year just as they would if cash wages had been paid. The W2 will include the value of the grain wages on the date they were paid.
Avoiding paying FICA taxes cannot be the sole reason employers pay grain wages and employers must take special precautions to ensure they are in compliance. It is imperative that the ownership of the grain passes to the employee. The employer selling the grain in the name of the employee does not qualify.
The employee must bear the costs incident to ownership of the grain, such as storage costs, dockage, market changes, etc. The employee must independently sell or market the grain and report on their tax return if there is a gain or loss on the grain. It is recommended that the employee hold the grain for at least five days to show the employee has assumed the risk.
It is good practice to have paper documentation of the grain transfer. The agreement should state, at a minimum, the date, market value of the wages at the date the grain wages are paid, type of grain, and amount of grain received. The agreement should also state the grain is paid to the employee without restrictions of any kind to do with as the employee wishes.
For example, if an employee is typically paid a $20,000 cash bonus at year end and the employee is under the Social Security tax limits, both the employer and employee pay $1,530 of FICA taxes. Instead, the employer could transfer $20,000 worth of grain to the employee, therefore paying a grain wage bonus. By paying that same employee a grain wage bonus instead of cash of $20,000, the employee and employer will save $1,530 each for a total savings of $3,060. The $20,000 will be reported on the employees W2 so that they can report their federal and state taxable income. The employee determines when to sell the $20,000 of grain. If the employee ultimately sold the grain for $20,500, then they are responsible for reporting the $500 gain on their personal tax return.
In summary, paying an employee grain wages in lieu of cash wages is a payroll tax saving strategy available to farm operations and their employees. The employer wants to be extremely careful to clearly show that the intent for paying an employee in grain wages is compensation for employment and not only being paid to avoid FICA taxes.
