Monday, August 26, 2019
Proper Tax Reporting of Commodity Wages
For agricultural labor, only cash wages are subject to Social Security tax. Wages paid in-kind to agricultural labor are not subject to FICA tax, FUTA (Federal Unemployment Tax Act) tax, or income tax withholding, but they are subject to income tax. I.R.C. §§ 3121(a)(8), 3306(b)(11). In 1994, an IRS Task Force produced guidelines that set forth several factors as relevant in determining when a particular in-kind payment qualifies for the exemption. Those guidelines are still relevant in structuring in-kind wage payment arrangements.
Payment in the form of grain, soybeans, cotton or other commodities usually qualifies for the exemption. Payments in the form of livestock or livestock products cause problems but, with careful attention to the rules, should qualify for the special treatment for wages paid in-kind. Payments in a form equivalent to cash are ineligible for the in-kind wage treatment.
But, are commodity wages subject to Form W-2 reporting? They are if they are “wages.” But, are commodity wages really “wages” for W-2 reporting purposes? I got into this issue in an earlier post with respect to whether wages paid to children under age 18 are within the definition of “wages” for purposes of the 20 percent pass-through deduction of I.R.C. §199A here: https://lawprofessors.typepad.com/agriculturallaw/2018/08/the-qualified-business-income-deduction-and-w-2-wages.html.
Commodity wages and W-2 reporting: revisiting the definition of “wages” – it’s the topic of today’s post.
I.R.C. §6051(a)(3) requires the reporting of “wages” as that term is defined in I.R.C. §3401(a). I.R.C. §3401(a) defines “wages” as “all remuneration” including all remuneration paid in a medium other than cash. That’s an all-inclusive definition. However, I.R.C. §3401(a)(2) provides an exception to that broad definition. Ag labor that is defined in I.R.C. §3121(g) is not a “wage” if it meets the definition of a “wages” under I.R.C. §3121(a). I.R.C. §3121(a) specifies that the cash value of all remuneration paid in any medium other than cash is included in the definition of “wages,” except that the term does not include (among others) wages defined in I.R.C. §3121(a)(8). That’s a key exception - it excepts remuneration paid in any medium other than cash for agricultural labor (i.e., commodity wages).
“Wages” as defined by I.R.C. §3121(a)(8)(B) provides another exception from the definition of “wages” for W-2 reporting purposes. This exception applies if the amount paid to the employee is less than $150 AND the total expenditures for ag labor is less than $2,500 for the year. Stated another way (and how the statute actually reads), cash remuneration for ag labor is exempt unless the wage amount to the payee is at least $150 or the total expenditures for ag labor is at least $2,500. The farmer doesn’t need to report any W-2 if all employees are less than $150 and the total to all employees is less than $2,500. That’s because if the exemption of I.R.C. §3121(a)(8)(B) is triggered, all cash wages paid to ag employees satisfy the definition of “wages” that are excluded from the definition of wages for W-2 reporting purposes.
Why File Form W-2?
Even though Form W-2 need not be filed to report commodity wage payments, there are good reasons to complete the Form and file it. For example, W-2 filing is necessary to allow the taxpayer to e-file the tax return. But, even if the commodity wage is not reported on Form W-2, it is reported as other income on Form 1040 if not supported by Form W-2. E-filing would still be allowed.
In addition, Form W-2 filing helps the recipient determine the correct amount of wages to report on line 1. Also, without Form W-2, the recipient may not know the value of the commodity on the date of payment. Similarly, Form W-2 helps the recipient determine the correct income tax basis of the grain sold when calculating gain or loss on the subsequent sale of the commodity that is received in lieu of wages. In addition, if the recipient does not receive a Form W-2, it will be easy for the recipient of the commodity wages to forget to report the fair market value of the commodity wages on their tax return. Also, properly reporting the commodity wages on Schedule F could qualify the taxpayer for “farmer” status if the taxpayer doesn’t have enough gross farm income to satisfy the two-third’s test for estimated tax purposes.
Commodity Wages – A Caution
A further consideration when deciding whether to pay agricultural wages in-kind is that the payment of in-kind wages may threaten an agricultural employee's eligibility for disability benefits and may reduce or eliminate the employee's retirement benefits. Agricultural employees receiving wages in-kind do not build up retirement or disability credit under the Social Security system. For that reason, many employers agree to pay part of the wages in cash and part in-kind. The cash portion would be credited for purposes of the quarters of coverage needed for disability benefits and for purposes of retirement benefits.
Also, payments in-kind for agricultural labor are not considered wages for purposes of determining the amount of earnings in retirement.
Although reporting the income on Form W-2 might be helpful to the employee, the farmer paying the commodity wage does not have a duty to do so. Value is inherently subjective. A bushel of corn in a livestock farmer’s hands, at the farm, may be valued differently when viewed from the perspective of the employee, who is responsible for handling and later selling that commodity. It is not, therefore, the farmer’s responsibility to determine the value of the commodity transferred to the employee and report that value on Form W-2.
Clearly, the Code does not require Form W-2 reporting for commodity wage payments. This comports with the Code’s longtime exclusion of agriculture from the need to determine the value of commodities that are transferred. For example, Form 1099-Misc need not be issued for crop share rents and the landlord need not report the value of the rent received in income as a crop share until it is converted to cash (or used to satisfy a liability).
Thus, while Form W-2 reporting is not required for in-kind wage payments to agricultural labor as noted above, it might be a good idea to do so in particular circumstances.