Federal Income Tax Withholding on Farm Wages by Robert D

Document Sample
Federal Income Tax Withholding on Farm Wages by Robert D Powered By Docstoc
					          “Federal Income Tax Withholding on Farm Wages”
                                    by: Robert D. Fleming
                            District Specialist, Farm Management
             Department of Agricultural, Environmental & Development Economics
                               Ohio State University Extension
                                          April, 2003

The objectives of federal income tax withholding are to collect income tax revenues on a current basis,
reduce the need for employees to file and pay estimated taxes, and to reduce the amount of tax owed
by a taxpayer at income tax filing time.

If the cash wages an employer pays farm workers are subject to Social Security and Medicare taxes,
they are also subject to federal income tax withholding. Farm employers must withhold Social Security
and Medicare Tax from any farm employee paid cash wages of $150 or more in a year or from all
employees if the wages paid to all employees total $2,500 or more during the year. Farm employers
may withhold income tax from any employee not meeting these guidelines.

In general, farm employees are farm workers if they do any of the following farm work:

   1) Raise or harvest agricultural or horticultural products on a farm,
   2) Work in connection with the farm and its tools and equipment
   3) Handle, process or package any agricultural or horticultural commodity if the employer
      produced more than half of the commodity.
   4) Do housework in the taxpayers private home if it is on a farm operated for profit.

An employee who performs both farm and non-farm work for an employer must be treated as a non-
farm employee. For example, if a farm employer also operates a fertilizer business or retail store,
employees who work in both the farm and non-farm business are taxable under general employment
rules. Farm work does not include re-selling activities such as a retail store or a greenhouse used
primarily for display or storage. There is a 20-factor test to use as a guide in determining whether a
worker is an employee or independent contractor (see IRS Form SS-8).

Employer Provisions

Employees subject to income tax withholding must file a Form W-4 with employers. Otherwise, the
employer must withhold federal income taxes from the employee's wages as if the employee claimed
only one withholding allowance. The amount of tax to withhold is set out in current IRS circulars A
and E. Withholding of income tax is not required if an employee certifies by filing Form W-4 that he
or she had no income tax liability last year and anticipates no income tax liability for the current year.
Employment Taxes
Cash wages paid to employees for farmwork are subject to social security and Medicare taxes. If the
wages are subject to social security and Medicare taxes, they are also subject to income tax

Cash wages include checks, money orders, etc. Do not count the value of food, lodging, and other
noncash items.

Commodity Wages
Commodity wages are not cash and are not subject to social security and Medicare taxes or income tax
withholding. However, noncash payments, including commodity wages, are treated as cash payments
if the substance of the transaction is a cash payment. These payments are subject to social security and
Medicare taxes and income tax withholding.

Family Members
Generally, the wages paid to family members who are employees are subject to social security and
Medicare, and income tax withholding, and FUTA tax. However, certain exemptions may apply for a
child, spouse, or parent of the taxpayer.

Exemption. Wages to a child of a sole proprietor or to a person who is a child of all partners in a
partnership or all members of an LLC are not subject to social security and Medicare. Report these
wages of Form W-2 with no tax showing in the social security and Medicare boxes. Do not report
them on a Form 1099.

Share Farmers and Alien Workers
Social security and Medicare taxes do not apply to wages paid to share farmers or to alien workers
admitted under section 101(a)(15)(H)(ii)(a) of the Immigration and Nationality Act on a temporary
basis to perform agricultural labor (H-2(A)workers).

Social Security and Medicare Taxes, Tests, and Exceptions
Generally, farmers must withhold social security and Medicare taxes on all cash wage payments to

The $150 Test or the $2,500 Test. All cash wages paid to an employee during the year for farm work
are subject to social security and Medicare taxes and income tax withholding if either of the following
two tests is met:

   1) Cash wages are paid to an employee of $150 or more in a year for farm work (count all cash
      wages paid on time, piecework, or other basis). The $150 test applies separately to each farm
      worker employed. If a family of workers is employed, each member is treated separately. Do
      not count wages paid by other employers.
   2) The total an employer pays for farm work (cash and noncash) to all employees is $2,500 or
      more during the year.

Exceptions. The $150 and $2,500 tests do not apply to the following situations:

           a) Wages paid to a farm worker who receives less than $150 in annual cash wages are not
              subject to social security and Medicare taxes, or income tax withholding, even if the
              employer pays $2,500 or more in that year to all farm workers, if the farm worker:
                     (i)     Is employed in agriculture as a hand-harvest laborer,
                     (ii)    Is paid piece rates in an operation that is usually paid on a piece-rate basis
                             in the region of employment,
                     (iii)   Commutes daily from his or her home to the farm, and
                     (iv)    Had been employed in agriculture less than 13 weeks in the preceding
                             calendar year.

Amounts paid to these seasonal farm workers, however, count toward the $2,500-or-more test to
determine whether wages paid to other farm workers are subject to social security and Medicare taxes.

           b) Cash wages paid a household employee are counted in the $2,500 test, but are not
              subject to social security and Medicare taxes unless the employer has paid the worker
              $1,300 or more in cash wages in 2001.

Deposit of Taxes Withheld

The frequency of the employer's deposits of withheld income tax, Social Security and Medicare taxes
on wages paid, plus the employer's share of Social Security and Medicare taxes for agricultural labor
vary, depending upon the amount of taxes and length of pay period.

Employers are to deposit the total tax due (employer and employee portions) by sending a single check
or postal money order covering Social Security, Medicare and withheld income taxes to an authorized
financial institution or a Federal Reserve bank. Some are required to use the Electronic Federal Tax
Payment System (EFTPS). Employers can also voluntarily use the EFTPS to deposit employment
taxes. If the tax owed is less than $2,500 for an entire return period (calendar year or fiscal year), an
employer can send in the deposit with the W-2 forms and Form 943. Call 1-800-555-4477 for more
information. Procedures are underway to permit making deposits electronically.

If the tax owed is $2,500 or more at the end of the year, the employer is classified as either a monthly
schedule depositor or a semiweekly schedule depositor. How often the employer must make deposits is
determined by taxes reported on Form 943 in the lookback period, generally two years earlier. For
example, the lookback period for 2001 deposits is 1999. If the employer reported more than $50,000
of employment taxes in 1999, deposits must be made semi-weekly. In addition, the employer must
make deposits per the EFTPS system noted above. A telephone version (859/292-5467) of EFTPS
may work well for many employers.

If not using the EFTB, a federal tax deposit (FTD) coupon must accompany each deposit. A booklet of
these coupons and instructions are automatically sent to the employer upon application for an
identification number. If an employer is not receiving the coupons, instructions and forms for reporting
and paying employment taxes, the IRS should be contacted.

Wage and Tax Statement

The employer must prepare a Form W-2, "Wage and Tax Statement," for every employee to whom the
employer paid any amount for services, including any payment made that was not in cash, if the
employer is in a trade or business. Copy A of Form W-2 for all employees, plus the transmittal Form
W-3 is sent to the Social Security Administration. Copies B, C, 1 and 2 of Form W-2 must be given to
the employee by January 31. Form 943, Employer’s Annual Tax Return for Agricultural Employees,
summarizes total wages paid, total Social Security and Medicare taxes owed, tax deposits made during
the year and any additional amounts owed. Form 943 is filed annually and is due by January 31 of the
next year for the previous tax year. Non-agricultural employers use Form 941 to report non-
agricultural wages and taxes to the IRS, but 941’s are filed on a quarterly basis and are due by the end
of the month following the close of the quarter.

Record Keeping

An employer must keep all employment tax records for at least four years after the date the tax
becomes due or is paid, whichever is later. This includes undelivered copies of Form W-2.

Employee Provisions

Farm employees should be aware that every citizen or resident of the U.S., whether an adult or minor,
must file returns and pay taxes, regardless of withholding, if their income exceeds annual limits. The
minimum limits were:
        Type of Return                                 2002
        Single                                       $ 7,700
        Single (65 or older)                         $ 8,850
        Joint Return                                 $ 13,850
        Joint Return (one over 65)                   $ 14,750
        Joint Return (both over 65)                  $ 15,650
        Head of Household (under 65)                 $ 9,900
        Married filing separately                    $ 3,000

These minimums are adjusted each year. Employees who have income tax liability of $1,000 or more
above the tax withheld should file Form 1040-ES and pay quarterly installments.

Working Students Subject to Withholding

Under the current tax law, an individual is not subject to withholding of federal income tax if:

 1) No tax was paid last year.
 2) No federal income tax liability is anticipated for the current year. The student employee should
    fill out Form W-4E, "Withholding Exemption Certificate," and give it to the employer. These
    forms can be obtained from the Internal Revenue Service district office. Student employees who
    do this will not have to wait for refunds.

Selected Internet Resources
IRS Digital Daily: http://www.irs.ustreas.gov/ or www.irs.gov

IRS Small Business & Self-Employed: http://www.irs.gov/business/small/index.html

IRE E-file: http://www.irg.gov/efile/index.html

US Treasury Department Web Site: http://www.treas.gov/
Responsible Agency
The Internal Revenue Service of the U.S. Department of the Treasury is the responsible agency.

                                             Ohio District Office
                                             Cincinnati, OH 45999-0002
                                             Forms & Publications (800) 829-3676
                                             Tele-tax topics      (800) 829-4477
                                             Fax-on-demand        (703) 368-9694

Live Telephone Assistance for people with hearing impairments: 1-800-829-4059 (TDD).

Agr. Tax Issues & Form Preparation, Phil Harris, Tax Insight, LLC, Madison, Wisconsin, 2002.

Circular A, Agricultural Employer's Tax Guide, Department of Treasury Internal Revenue Service,
Publication 51, January 2003.

Circular E, Employer's Tax Guide, Department of Treasury Internal Revenue Service, Publication 15,
January 2003.

Farmer's Tax Guide, 2002, Internal Revenue Service Publication 225, November, 2002.

RIA Federal Tax Handbook, Research Institute of America, New York, New York, 2002.