DO YOU PAY YOUR CHILDREN TO WORK ON THE FARM?
Thursday, February 4, 2016
By Lori Oraschin of Oraschin & Associates and Harley Hill Farm LLC
If you are operating your farm as a sole proprietorship, single member LLC or a Mom and Dad Partnership, AND have children between the ages of 12 and 18 years old, you should absolutely be paying your children wages for their work on the farm. Be sure that your children ARE working on the farm. Paying your children without them actually providing the labor services is illegal.
Children between the ages of 12 and 18 who work for their parents on a farm are not subject to Social Security Tax, Medicare Tax, Federal Unemployment Tax, or State Unemployment Tax. That means that a gross $100 wage is also a NET $100 wage.
As long as your child does not earn more than the “standard” deduction for a single person during the year, ($6,300 for 2015), including wages, interest, dividends, etc. there should be NO federal income tax due, OR a need to file an income tax return.
In most cases there would be no taxes due to the state for such a low annual wage.
Documentation and Reporting Requirements
First of all, you will need to file for an EIN “Employer Identification Number” with the IRS if you don’t already have one. You can do this online at www.IRS.gov Be sure that you answer the question for labor as “agricultural”. Then you will also need to register with your state as an employer. Remember to register as “exempt” for state unemployment.
Have a meeting with your child and write up a short employment agreement. The agreement should include expected duties, frequency of tasks expected, and pay rate. Check with your state wage and hour compliance division to be sure that you are going to pay at least the minimum wage for hours worked. (Some states have a higher minimum wage rate which supersedes the Federal rate.) You and your child should both sign and date the document and file it away in a safe place. It is also helpful to give a copy to your new employee so that he/she can review what their new job responsibilities are going to be.
Next, be sure to pay your child. It is best to pay your child by check to have the best proof of payment. Your child should accept his or her wages, and put the earnings into a bank savings or checking account in their name.
Last, in January of the following year, you will be required to provide 2 documents for the government. The first document is called an “Employer’s Annual Federal Return for Agricultural Employees” (Form 943). You will need to enter the number of employees on line 1, then zero fill all of the other lines, sign and send to the IRS.
The second document that you need to prepare is a W2 form. One copy needs to be sent to Social Security Administration, and another copy needs to go to your state, along with the W3 transmittal forms. These can be completed in paper or in many cases on-line. You will enter the wages paid in BOX 1, and then in BOX 16 for your state. I know that this might seem like a lot, but the tax savings are worth it!
Income Tax Savings
OK, now it is time to complete your income tax return. You should enter the amount paid to your child and reported on the W2 form on line 22, “Labor Hired”, on the Schedule F as a deduction. Let’s assume that you are in the 15% bracket, and your farm does not show a profit. For every $1000 you pay your child, you will save $15% ,(or $150) income tax on your federal tax return.
Now, assume that you are self-employed, you are in the 25% tax bracket, and have a farm profit, you will save 25% federal tax, (perhaps 3 to 7% state tax, depending on what state you live in), AND 15% self-employment tax! That would save you $400 or more for every $1000 you paid your children. WOW!
Cash Flow Considerations
Remember, when you paid your child and gave them the money to put into their account? Start teaching your child money management. Your child should be withdrawing his or her wages out of the bank to pay for things such as, school lunch money, school clothes, camp tuition, going to the movies, gifts for their friends birthday parties, and on and on and on.
So, why not have an amazing tax deduction for the money that you are handing out to you children anyway?
BONUS
Whatever your child does not spend from his/her earnings, you can invest into a ROTH IRA in their name. If your cash flow allows, you could add to their money an amount up to what their total wages were for the year, up to $5,000 annually. A ROTH IRA is a type of retirement account and is NOT considered in the financial aid analysis process for your child entering college.
Sooooo, yes you are right! You can deduct the cost of saving money for your child to go to college. Money can be withdrawn from your child’s ROTH IRA account to pay for higher education expenses PENALTY FREE. Only the “earnings” on the account is taxable at the time of withdrawal, not the original contributions. If your child should not go to college, then they could withdraw up to $10,000 to buy their first home tax and penalty free.
Conclusion
Unfortunately, for many of us who became alpaca farmers after our children were grown, these rules DO NOT apply to grandchildren. Boo Hoo. These employment rules however do apply to any other sole proprietorship, single member LLC or Mom and Dad partnership which is not a farm and might file a schedule C. The only difference would be that rather than filing a (Form 943), you would file a (Form 944).
In my opinion, this is one of the very best ways of tax planning that I advise. Teach your children how to run a farm through their labor, teach them how to manage money, and teach them how to save for the future. On top of all of this, save thousands in tax dollars! I LOVE the alpaca lifestyle!
If you are operating your farm as a sole proprietorship, single member LLC or a Mom and Dad Partnership, AND have children between the ages of 12 and 18 years old, you should absolutely be paying your children wages for their work on the farm. Be sure that your children ARE working on the farm. Paying your children without them actually providing the labor services is illegal.
Children between the ages of 12 and 18 who work for their parents on a farm are not subject to Social Security Tax, Medicare Tax, Federal Unemployment Tax, or State Unemployment Tax. That means that a gross $100 wage is also a NET $100 wage.
As long as your child does not earn more than the “standard” deduction for a single person during the year, ($6,300 for 2015), including wages, interest, dividends, etc. there should be NO federal income tax due, OR a need to file an income tax return.
In most cases there would be no taxes due to the state for such a low annual wage.
Documentation and Reporting Requirements
First of all, you will need to file for an EIN “Employer Identification Number” with the IRS if you don’t already have one. You can do this online at www.IRS.gov Be sure that you answer the question for labor as “agricultural”. Then you will also need to register with your state as an employer. Remember to register as “exempt” for state unemployment.
Have a meeting with your child and write up a short employment agreement. The agreement should include expected duties, frequency of tasks expected, and pay rate. Check with your state wage and hour compliance division to be sure that you are going to pay at least the minimum wage for hours worked. (Some states have a higher minimum wage rate which supersedes the Federal rate.) You and your child should both sign and date the document and file it away in a safe place. It is also helpful to give a copy to your new employee so that he/she can review what their new job responsibilities are going to be.
Next, be sure to pay your child. It is best to pay your child by check to have the best proof of payment. Your child should accept his or her wages, and put the earnings into a bank savings or checking account in their name.
Last, in January of the following year, you will be required to provide 2 documents for the government. The first document is called an “Employer’s Annual Federal Return for Agricultural Employees” (Form 943). You will need to enter the number of employees on line 1, then zero fill all of the other lines, sign and send to the IRS.
The second document that you need to prepare is a W2 form. One copy needs to be sent to Social Security Administration, and another copy needs to go to your state, along with the W3 transmittal forms. These can be completed in paper or in many cases on-line. You will enter the wages paid in BOX 1, and then in BOX 16 for your state. I know that this might seem like a lot, but the tax savings are worth it!
Income Tax Savings
OK, now it is time to complete your income tax return. You should enter the amount paid to your child and reported on the W2 form on line 22, “Labor Hired”, on the Schedule F as a deduction. Let’s assume that you are in the 15% bracket, and your farm does not show a profit. For every $1000 you pay your child, you will save $15% ,(or $150) income tax on your federal tax return.
Now, assume that you are self-employed, you are in the 25% tax bracket, and have a farm profit, you will save 25% federal tax, (perhaps 3 to 7% state tax, depending on what state you live in), AND 15% self-employment tax! That would save you $400 or more for every $1000 you paid your children. WOW!
Cash Flow Considerations
Remember, when you paid your child and gave them the money to put into their account? Start teaching your child money management. Your child should be withdrawing his or her wages out of the bank to pay for things such as, school lunch money, school clothes, camp tuition, going to the movies, gifts for their friends birthday parties, and on and on and on.
So, why not have an amazing tax deduction for the money that you are handing out to you children anyway?
BONUS
Whatever your child does not spend from his/her earnings, you can invest into a ROTH IRA in their name. If your cash flow allows, you could add to their money an amount up to what their total wages were for the year, up to $5,000 annually. A ROTH IRA is a type of retirement account and is NOT considered in the financial aid analysis process for your child entering college.
Sooooo, yes you are right! You can deduct the cost of saving money for your child to go to college. Money can be withdrawn from your child’s ROTH IRA account to pay for higher education expenses PENALTY FREE. Only the “earnings” on the account is taxable at the time of withdrawal, not the original contributions. If your child should not go to college, then they could withdraw up to $10,000 to buy their first home tax and penalty free.
Conclusion
Unfortunately, for many of us who became alpaca farmers after our children were grown, these rules DO NOT apply to grandchildren. Boo Hoo. These employment rules however do apply to any other sole proprietorship, single member LLC or Mom and Dad partnership which is not a farm and might file a schedule C. The only difference would be that rather than filing a (Form 943), you would file a (Form 944).
In my opinion, this is one of the very best ways of tax planning that I advise. Teach your children how to run a farm through their labor, teach them how to manage money, and teach them how to save for the future. On top of all of this, save thousands in tax dollars! I LOVE the alpaca lifestyle!
