Which is Better – Wages or Gifts?
My father was 47 when I was born and I am the oldest of three kids. My father “retired” at age 62 to start collecting social security, however, he could only earn a certain amount without having to pay the benefits back. My mother was the financial brains of the marriage and over the 3 years of waiting to age 65 when my dad could make unlimited amounts, she continued to defer grain sales for several years.
However, my brother and I did a lot of field work for my dad during this period. I drove combine and truck plus did fall and spring planting work after school. My brother was allergic to wheat dust so he drove the Cat tractor and did the plowing (I must admit that plowing was the worst job for me…. Around and around the field you go and it seems you never get done…. I was glad when we went to no-till).
Now my mother made a mistake. Instead of paying a wage to my brother and I which would have been non-taxable to us and fully deductible by my parents and subject to no payroll taxes; my parents simply gifted cash to us. A gift of grain would have been better than cash since the gifted grain would reduce their Schedule F income, however, in today’s tax environment, this income reported by us as capital gains when sold would likely be subject to the Kiddie tax resulting in income tax that would not be owed with wages.
Therefore, if you are a Schedule F farmer and have kids under age 18 and who work on the farm for you, my preference is to pay them wages of at least $6,000 or a bit more (the amount that is tax-free on a federal return). These wages are fully deductible by the farmer (as long as they are reasonable; tax-free to the child; and allow the child to fund a ROTH IRA.
If the child is over age 17, the farmer can pay commodity wages. These wages are exempt from federal payroll taxes (some states will assess unemployment or workers compensation taxes) and still tax-free to the child up to slightly more than $6,000 of compensation.
Remember, your children may be costly, but at least make sure that Uncle Sam helps defray part of the cost.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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